For months, there’s been talk of an imminent stock market crash. Not only has inflation been causing some market volatility, but the S&P 500 index is, on the whole, largely overvalued at this point.
Now without a crystal ball, it’s impossible to know when the market will tank. And to be clear, it could happen quickly, without warning.
The key, therefore, is to be prepared for that possibility at all times. Here are a few essential moves that could help you emerge victorious the next time stocks take a tumble.
Image source: Getty Images.
1. Having a fully loaded emergency fund
The only way to lose money in a stock market crash is to liquidate investments when they’re down. Leave your portfolio alone, and you won’t lose a dime. And if you load up on emergency savings, there shouldn’t be a real need to tap your investments when a need for money pops up.
Unplanned expenses can happen at any time, and you might also lose your job out of the blue. If you have money in the bank to cover those scenarios, you won’t have to touch your investments, which means if their values sink, you’ll come out unscathed.
As a general rule, it’s smart to have three to six months of living expenses on hand for emergencies. Some people feel more secure having a little extra. Figure out what sum works best for you and run with it, keeping in mind that three months’ worth of bills should really be your minimum savings target.
2. Stockpiling cash
When stock values fall, it gives investors a prime opportunity to add to their portfolios on the cheap. But to do that, you need money.
That’s why it pays to hoard some cash in advance of a stock market crash. To be clear, that cash shouldn’t come out of your emergency savings. Rather, you should have a separate pile of money on hand so that if a stock on your watchlist starts trading at a lower cost, you can scoop it up quickly.
3. Having a diverse portfolio
Having a wide range of investments can help you get through a stock market crash. But that doesn’t just mean that if you own 10 different stocks, you’re all set.
Within your stock holdings, make sure you’re invested across a few different market segments. That means, for example, owning some energy stocks, some bank stocks, a couple of auto stocks, some healthcare stocks, and so forth. Owning 10 tech stocks and nothing else isn’t a good bet.
Also, don’t just load up on stocks. Real estate investment trusts, or REITs, are a great supplement to stocks because their value doesn’t always rise and fall in conjunction with the broad stock market.
A stock market crash can be a scary thing. But it doesn’t have to be. We don’t know exactly when the next downturn will hit, but if you go in prepared, you’ll be more likely to come out a winner. Just as importantly, you’ll help yourself avoid the stress so many investors experience when market conditions take a turn for the worse.
10 stocks we like better than Walmart
When investing geniuses David and Tom Gardner have an investing tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*
David and Tom just revealed what they believe are the ten best stocks for investors to buy right now… and Walmart wasn’t one of them! That’s right — they think these 10 stocks are even better buys.
Stock Advisor returns as of 2/1/20
The Motley Fool has a disclosure policy.
