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Note from the editors: This story first appeared on The Penny Hoarder.
As of August 2021, the S&P 500 index was hovering around all-time highs.However, a number of factors could destabilize the economy, including the delta variant of COVID-19 and supply shortages that are causing prices to skyrocket across the board during the pandemic.You might be concerned that the stock market will crash again because there is so much uncertainty.
First, the bad news: yes, the stock market will eventually crash again.Crashing stock markets is a common occurrence.Since the 1929 Wall Street crash, the stock market has crashed 21 times, with each crash resulting in a 20% or greater drop from its peak.It will undoubtedly crash at some point.We just don’t know when it will happen.
Now for the good news: in the past, the stock market has always recovered.
The issue is that many people do not begin thinking about how to prepare for a stock market crash until after it has already happened.However, if you act now, the damage will be lessened later.Continue reading to learn five strategies for preparing for a stock market crash.
Don’t try to beat the clock.
Some people try to time the market, which means they try to sell their investments before the market crashes.Alternatively, they may refrain from investing when stocks are rising because they believe the market is overvalued.
The problem is that even Wall Street’s brightest minds can’t predict market highs and lows.The stock market may continue to rise for a long time.If you avoid investing because you are afraid of losing money or because you want to invest when the market is low, you may miss out on significant gains.
Dollar-cost averaging, which entails investing a set amount at regular intervals, is a better strategy.You’re already doing this if you invest in a 401(k) plan or a similar employer-sponsored retirement account because you’re putting money aside from each paycheck.The same is true if you put money into a Roth IRA or a traditional IRA on a monthly basis.Dollar-cost averaging produces better returns over time than trying to time the market.
Create an Emergency Fund
If you’re concerned about a stock market crash, an emergency fund is the best investment you can make.You’ll need a cash reserve in case you get hit with a large expense or lose your job right after the market crashes.Otherwise, you might have to take money out of your 401(k) or other investments before they recover.If you are under the age of 59, you may be subject to early withdrawal penalties.
If you don’t already have a six-month emergency fund, make it a top priority.This is, of course, a long-term goal that could take years to achieve.However, any safety net you can construct is a win.
Attempt to set aside at least 10% of your pay for emergency savings.If that isn’t possible or you want to accelerate your progress, picking up a side hustle to supplement your income is a good option.
It’s especially important to have enough cash reserves if you’re approaching retirement or have already retired.An untimely crash can wreak havoc on your retirement plans, forcing you to sell investments before they recover or file for Social Security benefits too soon.
If you’re retired or planning to retire in the next five years, meet with a fee-based financial adviser.They can assist you in determining how much cash you should keep on hand and whether you have the right stock-to-bond ratio.
Individual stocks should account for no more than 5% of your total portfolio.
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When it comes to surviving a stock market crash, having a well-diversified portfolio is critical.If you invest in individual company stocks, try to keep each investment to less than 5% of your overall portfolio.
Whenever you invest in stocks, you run the risk of losing money if the market falls.However, when compared to index funds, which move up and down with the overall stock market, the risks of investing in individual stocks are higher.For example, there’s a chance that one industry will be hit particularly hard, as was the case with tech stocks during the dot-com bust, as well as risks unique to a company, such as poor management or increased competition.
Risky Investments Should Be Reconsidered
If you’ve made a lot of money on high-risk investments like meme stocks (think GameStop and AMC), penny stocks, or Dogecoin, think twice about selling.There’s nothing wrong with putting a small sum of money into a high-risk investment if you have enough savings and don’t have any high-interest debt.However, because these investments are extremely volatile, your losses could be particularly severe.
Make a decision now about whether or not you want to invest more.
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If you have the stomach for it, a stock market crash can be a great opportunity to invest more.You could set aside extra money to invest when the stock market crashes if you have a solid emergency fund and are investing for retirement.
Because it’s natural to feel panicked when the stock market plummets, make a plan now.For example, if the S&P 500 index falls below 4000, you could decide to invest an additional amount.Alternatively, if you want to buy a stock, you could decide to buy it only if the price falls below a certain threshold.
This may appear to contradict what we said earlier about not trying to time the market.To be clear, you should only save money to invest during stock market dips if you’re already dollar-cost averaging by investing for retirement.However, if your finances are in good shape and your risk tolerance allows it, it’s fine to plan for some bargain hunting the next time stocks crash.
What Should You Do If the Stock Market Collapses?
When the market crashes, what should you do? Probably nothing.A stock market crash can cause panic, but it’s best not to make major financial decisions when you’re scared.Unless your financial situation has drastically changed, keep investing in your 401(k) after a crash.Don’t check your account every day.
It’s never fun to see your net worth plummet.However, you haven’t lost money if you don’t sell your investments at a loss.Your finances will eventually recover with time and patience.
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