The stock market has had a wild week, and now, fears of inflation are setting the stage for what could be a prolonged period of volatility or even a full-fledged stock market crash. As an investor, you may not want to hear that news. But if you make these critical moves, you can protect yourself in the face of volatility — and sleep better at night.
1. Boost your emergency savings
What does having money in the bank have to do with your stock portfolio? A lot, actually. When stock values decline, the only way to officially lock in losses is to sell investments at a price that's lower than what you paid for them. If you encounter an unplanned personal expense and need to tap your portfolio during a market downturn, you'll risk taking losses.
But if you have a robust pile of cash on hand in a savings account, you won't have to touch your investments when a need for money arises. And that alone could help you ride out a stock market crash or a period where investment values keep rising and falling.
How much emergency cash should you aim for? A good bet is to have at least three months' worth of living expenses in the bank, but for better protection, six months' worth of bills is even better.
2. Keep money you'll need in the near term out of stocks
Buying stocks is a great strategy for building long-term wealth. But for goals that are closer, it can be risky. As a general move, you shouldn't invest any money in stocks that you expect to need within seven years.
If you're saving up to buy a home, for example, and hoping to do so by 2025, then putting your down payment into the stock market isn't a great bet. The last thing you need is to lose a chunk of your portfolio's value because you wind up cashing it out when it's down.
3. Add dividend stocks to your portfolio
Dividend stocks are a great way to protect yourself in the face of stock market volatility. That's because companies with a strong history of paying dividends typically uphold that practice, even during periods when their share value drops. That means you'll set yourself up to have money coming in quarterly, which can help offset potential losses in your portfolio. While there are many dividend stocks out there to choose from, you may want to focus on Dividend Aristocrats, which are companies that have consistently raised their dividends for at least the past 25 years.
Seasoned investors may be fairly used to stock market volatility, but if you're a newer investor, it's easy to get unnerved. Just remember that market swings are very normal, as are corrections and even full-blown crashes.
Rather than let periods of volatility rattle you, do your best to protect yourself from unwanted repercussions. And also, do yourself a favor and don't check your portfolio value every day. Doing so could really mess with your mind and cause you to make rash decisions that ultimately don't benefit you at all.
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