The stock market has had quite the year, with the S&P 500 up by a whopping 110% since prices bottomed out in March 2020.
However, stock prices can’t continue rising forever. Some experts believe the market is overvalued, and it may be due for a correction sometime soon. Whether that will actually happen, though, is anyone’s guess. The stock market is famous for its unpredictability, and it’s uncertain when or if stock prices will fall.
That said, it’s normal to be concerned about an upcoming market crash. Although nobody knows for sure whether a crash is looming, there are a few things you can do right now to prepare your portfolio.
1. Make sure you’re diversified
Diversification is key to building a strong portfolio, and it can make all the difference when it comes to surviving market volatility. The more companies you’re investing in, the better chance your portfolio has of bouncing back after a market crash.
A diversified portfolio includes, at a minimum, 10 to 15 stocks from different industries. To be on the safe side, though, it may be wise to invest in at least 25 to 30 stocks from a variety of sectors.
If you’re investing in mutual funds or ETFs, your portfolio may already be well-diversified since each fund may contain hundreds or thousands of different stocks. It’s still smart to double-check that your funds contain different types of stocks, however. If you’re investing in an ETF that only contains stocks from one industry, for example, that can increase your risk.
2. Invest for your age
When you still have decades left before retirement, you can afford to invest more aggressively in stocks. As long as you’re buying strong stocks and you have a diversified portfolio, there’s a good chance your portfolio will recover eventually if the market crashes.
If you’re nearing retirement age, though, it’s a good idea to start investing more conservatively. Depending on how many years you have left before you retire, you may not have time to wait for your investments to recover before you need that money.
A good rule of thumb when it comes to asset allocation is to subtract your age from 110. The result is the percentage of your portfolio that should be allocated to stocks, and the rest should be invested in bonds or other conservative investments. So, for example, if you’re 35 years old, you should aim to invest around 75% of your portfolio in stocks and 25% in bonds.
3. Choose the right investments
The individual investments you choose will have a significant effect on your portfolio’s performance as well as its ability to recover from market downturns.
High-risk, high-reward investments can be tempting, but they’re not for everyone. These stocks may perform well in the short term, but they often struggle over the long run — especially if the market is volatile.
A safer option, then, is to invest in solid companies with strong underlying business fundamentals. These stocks likely won’t experience explosive growth, but they do have a better chance of surviving market volatility and earning positive returns over time.
4. Keep a long-term outlook
Market crashes can be daunting, but they’re also temporary. Even if the stock market does take a turn for the worse, it’s important to stay focused on the long term.
Even the strongest investments may take a hit during a market downturn, but given enough time, they’re likely to recover. By maintaining a long-term outlook, it will be easier to stay calm and keep your money invested regardless of what the market does.
Nobody knows for sure whether a market crash is on the horizon, but you can still take steps to prepare. With these four strategies, your investments will be ready for anything.
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