A market crash can be a scary thing. Especially if you’ve never experienced one before. You see headlines and hear that the market is down 300 points and your heart starts pounding.
Fortunately, you can take preventative measures to lessen the blow of a market crash on your finances by always putting on the shields. But the bad news, here, is that it is not something everybody can do at the same time. In fact, if you can not do it, you are not alone. You belong to the bottom 99 percent of the crowd. So, there is nothing to worry about, but at the same time, everything to worry about.
A market crash is not limited to the market, but it crashes financial lives, careers, businesses, and the livelihood of those who are not prepared to face such an event. A market crash is not just a blip in a chart, but it is a major occurrence that can have many negative implications which are not limited to the market itself.
First of all, what is considered a Market crash, and what causes it?
When multiple related indices drop by double digits quickly, it is considered a stock market crash. A stock market crash is not precisely defined by a certain percentage decline, but participants typically recognize one when they see it.
A crash is typically caused by an adverse event that impacts all companies in the same industry or economy. During a crash, stock prices generally fall over a few days — or even months — or years across the board.
In layman’s terms, a Market crash is not just another downturn of a market, but it is an event that triggers panic in financial markets and causes some serious damage to people’s lives (especially if you are not prepared for it).
So, how can you always stay prepared for a Market Crash?
There is nothing like proper timing for a proper escape
Some people practice market timing, which entails trying to sell their investments before the market collapses. Alternatively, they avoid investing when stock prices are rising because they believe the market is overvalued.
The point is that nobody can accurately foresee the market’s highs and lows, not even the brightest minds on Wall Street.
Instead, try investing a set amount at regular intervals.
Learn more: Dollar Cost Averaging
Build Your Emergency Fund
A market crash can trigger a financial crisis. During a crash, people tend to put their investments on hold and hold on to their cash reserves instead. Many businesses struggle because there is less activity, which means less money for them. If you have lost your job or are self-employed, the bad economy could also put you out of business.
If you have a solid emergency fund built up, however, you can avoid predatory lenders who charge high-interest rates and fees for loans that should be free from interest charges if you apply for them through your bank. You may not be able to avoid every fee or interest rate hike, but the money in your emergency fund can help you negotiate better terms with predatory lenders when a financial crisis hits.
Review Your Debt Load
If a market crash is bad for your finances, it’s often even worse for your debt. Most people who lose their jobs can’t make their debt payments, and a significant number of businesses — many of which are in the service industry — fail because consumers don’t have money to spend. While avoiding debt is prudent, you should review your level of personal and business debt so that you can address the problem if a market crash turns your finances upside down.
Learn About Trading
If you’re interested in investing, one strategy that may help you avoid some of the worst consequences of a market crash (while still enjoying the bulk of the gains) is to trade stocks yourself. Obviously, this isn’t a strategy for everyone — especially if it conflicts with your career or personal beliefs — but it’s an interesting way to get involved and learn how the market works. If you have a passion for investing and learning about markets, trading yourself could be a worthwhile endeavor.
A trader is one who benefits both from bullish as well as bearish market conditions. A short-term trader is one who takes quick positions in the stock market and profits from fluctuations in prices. A long-term trader, on the other hand, takes a longer-term view of trading and invests for months, even years.
The difference between a short-term trader and a long-term investor is that the goals of a short-term trader are to generate profits regardless of market conditions and a long-term investor buys stocks as part of his plan to build wealth over time. There could be occasions when both traders and investors turn losses during the same period, but the important difference is their approach toward their financial goals.
How much can you afford to lose, and how much would be too much?
Ask yourself honestly: How much can you afford to lose, and how much would be too much? The larger the amount of your investment, the more important it is to have a plan for what you’ll do if things go wrong.
If you’re investing a lot of proportion of your wealth in stocks — or even just one interest — you need to figure out your personal risk tolerance. The stock market is an emotional roller coaster ride so it’s best if you have the right skills and knowledge to handle the market swings.
The best way to save your “emotional self” from a market crash is to always remain prepared for a loss. You should know the exact range of loss you will be able to bear.
You should build your asset allocation with the full expectation of a 20% to 30% market decline.
Review your Goals
A market crash can really test your resolve. If you have long-term goals, it’s worth it to wait for the market to go back up before you cash out and give up on your dreams.
If you are planning for the future, don’t panic when everything seems to be going wrong. Review your goals and tailor your financial plan according to what’s happening in the markets. You can make changes along the way so that they benefit you in better ways when everything is looking up again.
One of the best ways that can help you deal with a market crash is having an objective eye on things. A proper mindset will surely aid you to save whatever is possible during a downturn.
Invest regularly but also save regularly as well
Being able to weather financial ructions is more important than it ever was, given the recent economic troubles. Since even a small market downturn can last for months and negatively affect your ability to save and invest, you need to develop a plan for better savings and spending when things look up again.
While it is true that accumulation of wealth is only possible with investing, it is also true that the money you save will be the only thing on your side in the scenario of a market crash. Having a backup plan for when the markets falter will make it easier for you to take the long-term view.
How committed are you to your investments?
Market ups and downs can be very discouraging for investors who have already invested their hard-earned money in the stock market. At times like these, you may feel like anything on the earth is better than putting your money in the markets….but that is simply not true!
When it comes to investing, there will always be ups and downs…and if you don’t have a proper plan for investing your money, a market crash can easily wipe out years of work.
When you feel like giving up on investing, remember that it is a long-term process. A market crash is nothing compared to the years it will take for you to build a nice nest egg.
Examine the sector concentrations in your portfolio.
Tech stocks drove the drop in the 2000 stock market meltdown. Banks suffered the most during the 2008 market crash. Energy, travel, and leisure companies were currently among the worst-performing sectors in the bear market for 2020. Always be cautious about dramatically over-weighting your preferred sector. You don’t know what the next correction would look like. Even though it seems like a wise choice and has been performing well, investing all of your money in one industry doesn’t always work out nicely.
Look for valuation metrics that tell a story of value.
The simplest reason why people invest in stocks is to make money—to ‘buy low and sell high. In order to do this, an investor needs to try to anticipate what the stock market will do next. To help with this process of anticipating the future direction of the stock market, investors often look to certain valuation metrics as signals of where stock prices might go next.
What is this “Diversification” thing everybody is talking about?
Basically, an investor’s overall risk profile is decreased by a diversified portfolio, which consists of a variety of investments. Owning stocks from a variety of various sectors, nations, and risk profiles as well as other investments like bonds, commodities, and real estate are examples of diversification.
Now, why is everybody talking about the “Diversification of Portfolios”? How will it shield you against the market crash? Or will it at all? Well, it’s an interesting question to ask. According to the experts, a diversified portfolio is a wise option for investors looking to build wealth over the long term. This is because, instead of putting all their money in one place, they can have less risk (which comes with fewer rewards) of course.
But the point of the matter is that, no matter how much you diversify your portfolio, a downturn in one sector will indeed affect your net worth. But then again, diversification is about reducing risk and not eliminating it. After all, the risk is a part of every portfolio.
But yes, if you can say for sure that the market is going to crash, there would be no better option than diversification of your portfolio. As said before, low reward comes with low risk. But still, a higher risk may or may not mean a higher reward.
Thanks for reading this article. Hope you learned a little.