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Friday (10 October) saw the S&P 500 drop 2.7%, in the largest single-day fall since April, as President Trump threatened China with 100% tariffs. The FTSE 100 wasn’t immune either, with the index closing down almost 1%. Even though I don’t see this blowing up into a full crash, it’s prudent to think in advance about how an investor can be prepared for any events coming up.
Sector exposure
The largest hit from Trump’s announcement was seen among companies heavily exposed to China, along with semiconductor and similar stocks due to potential export restrictions. Stocks such as Advanced Micro Devices and ON Semiconductor lost around 8% in value on the day.
This serves as a good lesson going forward to have a diversified portfolio for any potential situation that could blindside investors. Of course, no one can perfectly predict what the cause of a market crash will be ahead of time. But that’s why it’s key to have a mix of sectors, so that even if one becomes the focal point, the others can help to cushion the impact.
Dry powder
Another factor is to leave some money aside, which can be held in an easy-access high-interest savings account. That way, it’s still generating a return, but can be used to take advantage of opportunities to buy shares cheaply should any market correction occur in the coming months.
The risk here is that a crash never comes. In this case, the return from the cash could be lower than what could be achieved from stocks.
Income potential
Another way to prepare is to look at the current dividends being paid from an existing portfolio. During times when the market is falling, even companies that aren’t overly impacted can experience a share price decline. It might mean that there’s no capital appreciation for a time. During this period, an investor could benefit from generating income from dividends.
For example, they could consider BT Group (LSE:BT.A). The stock is up 27% over the past year, with a current dividend yield of 4.42%. If we put the pandemic period to one side, the company has paid a constant dividend since 2002.
I think the dividend is sustainable for several reasons. A lot of BT’s large capital spending has been driven by its full-fibre broadband (FTTP) rollout. BT expects that after the peak fibre rollout, the capex will reduce by more than £1bn from FY26 levels. That reduction in investment pressure frees up cash for higher dividends.
The fact that the business is generating decent free cash flow relative to its dividend obligations is another positive. This means it’s not really going to struggle if money is taken out of operations via a dividend payment. As a risk, it has significant net debt (close to £20bn in the full-year results from March), which means money must be allocated to interest payments.
A black swan event could cause the stock to fall. But given it provides core utility services, I see it as a defensive stock that could weather most storms.
