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Stock values have soared in the course of the pandemic, and right now, investing is a pretty expensive prospect. But the stock market bubble that’s formed has to burst eventually — and that could potentially happen sooner rather than later. Throw in the fact that the pandemic still isn’t over, and there’s good reason to gear up for a stock market crash in the near term. And if you’re worried about that idea, there’s one important move you need to make.
It pays to start hoarding cash
There are a few reasons why it pays to boost your cash reserves when you fear a market crash is coming. First, having more money on hand could put you in a position where you’re able to leave your portfolio alone when its value declines, thereby sparing you from actually locking in losses.
Say you need $5,000 for a home repair, and normally you’d cash out some investments to scrounge up the cash. Well, you don’t want to do that when stock values are down, so if you pad your savings account, you won’t have to liquidate investments at a loss.
Secondly, it’s easy to look at stock market crashes as a bad thing, but actually, they’re a solid buying opportunity. And to buy stocks, you need cash on hand.
Image source: Getty Images.
How to boost your cash reserves
A lot of people have lost income during the pandemic and aren’t fully employed, so not everyone is in a position to magically round up extra cash. But if you’re still working and haven’t taken a hit to your income, you have a real opportunity to eke out some savings and pad your cash reserves.
Furthermore, a round of $1,400 stimulus checks just went out. If you received one and you don’t need it to cover essentials, then you have a choice. You can invest that money now, or you can hang on to it and wait for stock values to drop.
Both options are reasonable. The reality is that we don’t know when the market will tank, and investing your stimulus immediately puts it to work. On the other hand, if you’re convinced that the market is headed for a steep decline, then it could pay to bank your stimulus. That way, you’ll have an extra $1,400 on hand for a rainy day, and you’ll also have more money at your disposal if stocks go on sale.
Prepare for an eventual crash
Without a crystal ball, it’s impossible to know when the stock market will crash. And the reality is that it may not happen this year. While we’re still grappling with a pandemic, the economy has also been steadily improving month after month (in fact, the jobless rate fell nicely in March), which lends credence to the argument that stocks might hold steady for quite some time.
But either way, it’s never a bad idea to be ready for a downturn, and having adequate cash reserves is one of the easiest ways to gear up.
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