The stock market has taken a tumble recently, officially entering correction territory earlier this month.
While many investors might be concerned that this downturn could turn into a full-blown crash, nobody can say for certain whether or not that will happen. But that doesn't mean you can't prepare just in case.
By taking these four steps, you can ensure you're as ready as possible no matter what happens.
1. Diversify your investments
Diversifying your investments involves owning a wide variety of stocks from multiple industries. While the majority of stocks will be able to survive a market crash, not all of them will. By owning a broad selection of stocks, you can limit your risk.
There's no set number of investments you should own, but most experts recommend at least 25 to 30 stocks from a variety of industries. This way, if one or two of your stocks don't survive a downturn, it won't sink your entire portfolio.
2. Double-check your asset allocation
Asset allocation refers to how much of your portfolio is allocated to stocks versus bonds. Stocks generally earn higher returns than bonds, but they also carry higher risk and are often hit harder during market downturns.
If you still have decades before you plan to retire, it's wise to put the majority of your money toward stocks. Even if your portfolio is heavily affected by a downturn, you still have plenty of time to let your investments recover.
On the other hand, if you're nearing retirement age, you might want to allocate more of your portfolio toward bonds. You'll likely earn lower average returns with bonds, but your retirement fund won't be hit as hard if the market crashes.
3. Avoid knee-jerk reactions
Market volatility is difficult to stomach for even the most experienced investors, but it's important to remain as calm as possible and avoid making any rash decisions — such as pulling your money out of the market or stopping investing altogether.
Investing in the stock market is a long-term strategy. It's normal to see ups and downs in the short term, but over decades, the market has a history of earning positive average returns.
The best thing you can do right now, then, is to sit tight, wait it out, and hold your investments regardless of what the market is doing. Even if there's more volatility on the way, the market will eventually recover.
4. Choose the right investments
With the right mix of investments, it's extremely likely your portfolio will recover from a stock market crash. Again, not all stocks will survive periods of volatility, but the ones that are most likely to pull through are strong companies with solid underlying business fundamentals.
Factors like healthy financials, a competent leadership team, and a strong competitive advantage give these companies a better chance of surviving market turbulence. The more of these stocks you have in your portfolio, the better off you'll be if the market takes a turn for the worse.
The stock market might be daunting right now, but that doesn't mean you shouldn't invest. By taking a few precautions, you can rest easier knowing your money is protected — no matter what the future holds for the market.
10 stocks we like better than Walmart
When our award-winning analyst team has 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.*
They 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 2/14/21
The Motley Fool has a disclosure policy.