Stock market crashes are a part of investing. We can’t tell you when the next crash is coming; stock market crashes are inherently unpredictable.
Every investor lives with the risk. It has happened before. It can happen again. Years of hard-earned savings and retirement funds could be wiped out in hours if it does.
Although no one can predict when a market crash will occur, that doesn’t mean investors can’t be prepared. Fortunately, you can take steps to shield the bulk of your assets from a market crash or even a global economic depression.
By taking the proper precautions now, you can sleep soundly when the stock market drops, something that’s bound to happen sometime.
Here are precautions to take so you can sleep better when the inevitable happens:
- Trust in Diversification
Diversifying your portfolio is probably the single most important measure that you can take to shield your investments from a market crash.
When a market decline hits, your results may vary, and perhaps for the better if you’ve invested money across different baskets of asset classes like stocks and bonds.
Diversifying, or distributing your money across investments, helps reduce the investment risk and smooths your journey through a tumultuous market.
Diversifying helps ensure your investments aren’t situated solely in one type of asset. No doubt you’ve heard the expression, “don’t put all your eggs in one basket” – well, it’s true! So if one stock has a bad day, your other investments may help offset those losses.
- Know What You Own – and Why
A reaction to a temporary slump driven by fear isn’t a good reason to dump an investment. But if you look back at your original stock research notes, you may find some valid reasons to sell.
Thorough stock research includes a written record of every investment’s strengths, weaknesses, and purpose in your portfolio. Your research is like an investing road map, a tangible reminder of the things that make a stock worth holding.
This document can prevent you from tossing an excellent long-term investment from your portfolio during a market downturn just because it had a bad day. On the flip side, it also provides clear-headed reasons to part ways with a stock.
- Determine Your Risk Profile Before Investing
Every investment has a different risk associated with it, and the kind of investment you make should depend on your risk tolerance.
Before investing, it’s essential that you set your risk appetites and then look at options accordingly. Your risk tolerance might depend on your age, objectives, and investment timeline.
- Focus on the Long Term
Watching your portfolio’s value shrink when the stock market declines and doing nothing about it can be challenging. It’s normal to feel pessimistic after a crash, but doing nothing is often the best course if you’re investing for the long term.
It’s important to remember that you lock in your losses when you sell investments in a downturn. If you plan to reenter the market at a sunnier time, you’ll almost certainly pay more for the privilege and sacrifice part (if not all) of the gains from the rebound. So doing nothing at all might be the best solution.
- Be Ready to Buy the Dip
Market dips can be a great buying opportunity. Think of it as buying stocks on sale when the market crashes. The trick is to prepare and be ready for the fall and be willing to commit some cash to snap up investments whose prices are dropping.
Here’s how to tell if you might be ready to buy the dip:
- You already have an emergency fund and allocated money for retirement.
- You have enough money for everyday expenses.
- You’ve set aside some cash, so you’re prepared for a flash sale when disaster strikes.
- You keep a running wishlist of individual stocks you would like to own.
If you buy the dip, you probably won’t cash the stock in for a while, but that’s fine. The point is to be opportunistic on investments you think have good long-term potential.
- Keep Your Emotions in Check
Whatever you do, don’t let your emotions dictate your investment decisions. It’s important not to be scared by a falling market. It is understandable to get disheartened by seeing considerable losses to your investment.
But making impulsive decisions at this time will only result in your digging yourself into a deeper hole. This is not the time to sell your investments; instead, if you have surplus funds, this is a good time to invest in the market since you get more of the same stocks for lower prices, preparing you for the future rebound.
Keeping your emotions in check and remaining logical and disciplined is one of the fundamental things that differentiate a profitable investor from an unprofitable one, so let your discipline and focus work for you.
- Get a Second Opinion
Consider hiring a financial advisor to examine your portfolio and provide an independent perspective on your financial plan. It’s not uncommon for financial planners to have their own financial planner on their payroll for the same reason. A bonus is knowing there’s someone to call to talk you through the tough times.
- Keep Sufficient Cash for Emergencies
According to financial experts, quite possibly the worst thing you can do when the markets are falling is to sell your investments. You will have to settle for pennies and miss the eventual market rebound.
Unfortunately, it might not be optional for those who do not have adequate cash in hand for emergencies. Therefore, you must always have some money stored separately for a rainy day to help you survive the recession.
Read Now: Why You Should Open a Savings Account.
If you are looking to learn more about investing, contact our team at Count today to help you create the best strategy for investments in the future.