In the last few days, a lot of news piled up, from renewed tensions between the U.S. and Iran to memory and storage stocks selling off, leading investors to rotate out of tech stocks. And even more broadly, major indexes like the S&P 500 (SNPINDEX: ^GSPC) were feeling the pressure.
That, however, doesn’t necessarily mean a stock market crash is a given. It also doesn’t mean knee-jerk reactions are warranted, as they can damage a portfolio in the long term.
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That said, there’s nothing wrong with being prepared if the market were to experience a prolonged downturn. And ahead of a market crash, history suggests making one move can help long-term investors win out.
Standard considerations
When markets look rocky, more focus shifts toward consumer staples and income stocks.
For consumer staples, those companies are viewed as potential safe-haven investments because people still need to buy essential products no matter what’s happening in the world. Even if the market looks like it’s in trouble, shoppers will still pick up Tide detergent, Bounty paper towels, and Crest toothpaste, all made by Procter & Gamble (NYSE: PG).
Companies with reliable dividends are typically mature and have stable business models. That doesn’t mean they are immune to a broad market sell-off, but they can absorb such a downturn a little more easily, typically with less volatility in price swings. Dividend Kings, the companies that have increased their payouts for 50 or more consecutive years, offer that kind of stability while also paying out consistent dividends.
Consumer staple stocks and Dividend Kings can be great additions to a portfolio and serve it well over the long term. But selling a stock quickly to buy something else can be a reactive move driven by fear, which can create two issues.
One issue is that selling a stock has tax ramifications. The second issue is that there’s no way of knowing when a market rebound will occur. Selling a stock at a loss or at a small profit while it’s down during market turbulence runs the risk of missing out on a long-term rally.
What history says to do instead
There will always be downturns, sell-offs, corrections, and crashes, and they will all feel unnerving. But over the long term, staying in the stock market has worked out for investors who can handle the volatility.
