A stock market crash may be right around the corner.
Or maybe not.
In the absence of a crystal ball, it's hard to predict when stock values will start to sink. Had you asked me earlier this year when the next crash would be, I would've said, “Sometime during the first quarter of 2021” — the main reason being that stocks kicked off the year at ridiculously high values and I figured that bubble was bound to burst.
And it is bound to burst — eventually. But rather than expend energy trying to figure out when, you're better off focusing on these four action items instead.
1. Shore up your emergency fund
The one thing that can help you coast through a stock market crash is a solid emergency fund. If you make sure to have ample cash reserves, you won't be forced to sell off investments when they're down to satisfy a need for cash. And if you don't sell at a loss, you won't lock in a loss. It's that simple.
2. Invest in dividend stocks
Companies that have a strong history of paying dividends generally continue to do so, even during periods of stock market turbulence, and even when their actual stock value declines. If you don't own dividend stocks, consider adding some to your portfolio. Think of it as a means of income diversification.
3. Make sure your portfolio is as diversified as you think it is
You'll often hear that a diversified portfolio is the key to getting through a stock market crash. But while you might think you have a nice mix of investments in your name, when's the last time you actually checked? You may find that you're a little too overloaded with tech stocks for comfort, or that you're missing stocks from the energy sector. Make certain you're comfortable with your personal investment mix before the market takes a turn for the worse.
4. Funnel extra cash into your brokerage account
Maybe you're saving a bit more money than usual due to the pandemic (if you're still working remotely, you should at least have an opportunity to bank the money you'd normally spend commuting). If that's the case, and you're all set with emergency savings, pump that extra cash into your brokerage account so that if the market does tank, you'll be ready to pounce. Stock market crashes are generally regarded as negative events, when in reality, they can serve as buying opportunities. But you'll need money to take advantage of those openings, so have that cash ready in advance. And while you're at it, make a list of the stocks you'd love to scoop up on the relative cheap so you have a strategy in place for when they become more affordable.
The idea of a stock market crash may be daunting, especially if you're a new investor who's never experienced one. But rather than waste time trying to determine when the market is headed for a downturn, take steps to prepare for that eventuality. Being proactive will give you peace of mind and put you in a better position to weather whatever storm is on the horizon.
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