Beyond the typical concerns about job security and family finances, a stock market crash is a source of constant stress for many across the globe. The Great Recession and the Panic of 1907 taught us that crashes are a regular feature in the ebb and flow of the stock market.
They can happen at any time, and they almost certainly will happen again sooner or later. It’s almost impossible to predict when the next stock market crash will strike. However, with some good planning, you can reduce your risk exposure and substantially mitigate the effects of a stock market crash in your life.
Here are seven tips on protecting yourself against a stock market crash.
- Do your homework and research your investments.
The first step to protecting yourself against a market crash is to do plenty of research on the investments in your portfolio. Although diversification is key, some assets, such as individual stocks, are riskier than others.
Ideally, you want to find relatively stable investments with low volatility and correlation to the stock market at large — assets that might fall less or even increase in value when the broader market is in a correction or a full-blown bear market.
If you’re not familiar with your holdings, you can seek guidance from investment banks that are familiar with market crashes and how to prevent losses from them. Check https://www.rmib.com/vn/ to learn more about investment banks.
- Stay diversified
When the stock market is on a tear and all sectors are booming, it’s easy to feel invincible and go all in. However, those who have diversified their holdings will be much better off when a crash comes.
Diversification reduces the risk of a portfolio by spreading your money across a variety of different investments. If one sector or type of investment suffers a significant setback, others will likely be doing well by comparison.
The goal is to make your portfolio as bulletproof as possible to weather any storm. To protect against a stock market crash, you should diversify your portfolio across various asset classes like bonds, real estate, and alternative investments, such as precious metals and commodities.
- Don’t invest too much at one time.
When you’re optimistic, you may urge you to invest as much money as possible in the stock market. This may be tempting, but it’s not a great strategy. If a stock market crash occurs, you’re going to be hurt, and you may be unable to make a withdrawal from your brokerage account for months or even years.
If you have to withdraw from your investment account due to a sudden job loss or medical emergency, you could face a significant delay in accessing your money. When deciding how much to invest, remember that a market downturn is inevitable.
Having a comfortable amount of cash on hand for a rainy day is essential. This could mean the difference between being able to weather the storm or being forced to withdraw from your investment account when things get tough.
- Use stop-loss orders
A stop-loss order is a type of order you place with your broker. It instructs your broker to sell a particular stock if it falls to a specific price. For example, if you own Apple stock and want to protect yourself against a stock market crash, you can place a stop-loss order for $100 below the current price.
If the price of Apple falls to $100, your broker will automatically sell your stock. This is an effective way to protect your investment when all hell breaks loose.
However, remember that you might not break even if you use a stop-loss order.
- Learn to value investing over speculation
One easy way to lower your risk is to shift your focus away from high-risk, high-cost stocks and toward low-cost, low-risk index funds and ETFs. Index funds and ETFs don’t try to “beat the market”; they track the performance of specific market segments
Investing in low-cost, low-risk funds can significantly reduce your risk of a stock market crash. Avoid short-term trading strategies, which have no place in a long-term investment portfolio. Be patient and resist the urge to sell when everyone is panicking. And remember that even the best fund managers don’t consistently beat the market.
- Keep an eye on risk factors.
Some people invest heavily in stocks even during a market downturn, reasoning that the low prices will allow them to buy more shares. While this is certainly possible, there’s no guarantee that the market will soon rebound.
A prolonged bear market could cause stocks to fall even further. Keep an eye on indicators commonly associated with a crash, such as the VIX index and the TED spread, and be ready to act if they spike.
Keep in mind that these indicators might not trigger a crash every time. If you see these risk factors increase, keep an eye on them. If they continue to rise, it could indicate a coming crash.
- Stay out of debt and have an emergency fund.
Debt can lead to various problems, such as a higher risk of bankruptcy in the event of a stock market crash. An emergency fund can help weather the storm easily, even if your investments take a hit.
If you’re prepared with a savings account with a few months’ worths of living expenses, it’s unlikely that a stock market crash will significantly impact your life.
Parting shot
If you are looking into investing in stocks, it is essential to know that a downturn in the market is inevitable. It can happen unexpectedly, leaving you shaken, scared, and running for cover. When protecting yourself against a stock market crash, there’s no such thing as being too careful. Follow these tips, and you’ll be well positioned to handle just about anything the market throws your way.