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Will the stock market crash before 2021 comes to a close? We really don’t know.
Stocks have been overvalued for such a long time that many investors are shocked that the market hasn’t tanked this year already. But predicting a stock market crash is a difficult thing to do, even when the circumstances seem ripe for one.
Preparing for a stock market crash, however, is a much easier feat to pull off. In fact, you can gear up for a downturn by adopting one simple investing strategy.
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Don’t put all of your eggs in one basket
You’ll often hear that it takes a diverse portfolio to grow wealth over time. And that’s true. But a diverse portfolio can do more than just make you rich — it can also protect you when things take a turn for the worse.
Imagine you decide to keep 60% of your portfolio in tech stocks. Well, what happens if a stock market crash ensues and tech stocks are disproportionately affected? Suddenly, the value of your portfolio could sink.
That’s why it’s important to maintain a diverse investment mix, and you can do so in a number of ways. First, you can simply buy a bunch of different stocks across a range of sectors.
For some investors, “a bunch” might mean 15 stocks or so. For others, it might mean 50. A good bet is to aim for at least 15 different stocks if you want to hit different corners of the market.
Another option for building a diverse portfolio is to load up on broad market index funds. Index funds are passively managed funds that have the goal of matching the performance of the benchmarks they’re tied to.
If your goal is to diversify, S&P 500 index funds are a particularly good bet. These funds track the performance of the S&P 500 itself, which consists of the 500 largest publicly traded companies.
The S&P 500 is generally considered to be representative of the stock market as a whole. And so when you buy shares of an S&P 500 index fund, you effectively bet on the performance of the broad market.
Don’t sweat a stock market crash
Stock market crashes can be scary, especially for newer investors. But they’re also not something you should lie awake at night worrying about.
The stock market has seen its share of hard times, but it’s also managed to recover from every decline it’s faced. And if you make a point to maintain a diverse portfolio, you’ll be more likely to emerge from a market crash unscathed.
Remember, stock market crashes can be short-lived. Though the market tanked early on during the pandemic, it had more than recovered before 2020 came to an end.
But in addition to diversifying, it’s a good idea to take a long-term approach to investing. If you tell yourself you’ll buy quality stocks or index funds and hold them for many decades, then any market crash that comes to be could, in the long run, end up being nothing more than a temporary setback.
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