It's no secret that the U.S. economy has been in a major slump since the COVID-19 pandemic took hold about six months ago. But while the stock market suffered a major decline back in March, things have since improved for investors in a very big way.
Still, that doesn't mean we can let our guard down. In fact, 51% of Americans think it's likely that the stock market will lose 20% of its value in the course of the next six months, according to the SimplyWise September 2020 Retirement Confidence Index.
Clearly, that's a concerning thought whether you're working or retired. But we also can't rule out the possibility of another near-term market crash, so here's what to do to prepare.
1. Have emergency savings
No matter your age or income level, having a solid emergency fund can prevent you from taking losses during a stock market downturn. If you have enough money to cover at least three to six months of living expenses, you'll be able to use that cash instead of liquidating investments in a brokerage account or taking withdrawals from a 401(k) or IRA to keep up with your bills. In fact, given the state of the economy today, it could pay to boost your emergency fund to more like six to nine months' worth of living costs for extra protection.
2. Make sure your assets are allocated appropriately
The right asset allocation could spare you a world of financial loss during a stock market crash. If you're younger and still working, you can generally afford to keep the bulk of your long-term savings in stocks since you'll mostly be relying on your paycheck to cover the bills. But if you're retired, you'll need to make sure a substantial portion of your portfolio is in safer investments, like bonds, so that if the stock market does crash, your savings won't take a massive hit you never recover from. In addition, it's a good idea to have a portion of your retirement plan in cash so it can function like an emergency fund.
3. Don't let panic drive you to make bad choices
Sometimes, stock market crashes are predictable. Other times, they're not. But no matter the circumstances, don't make the mistake of dumping your stocks the minute the market takes a turn for the worse. Stock market downturns are actually fairly common, but one thing you should know is that the market also has a strong history of recovering from losses. And some of those recoveries aren't too prolonged, so if you sit tight and avoid making rash decisions, you'll reduce your chances of actually losing money after all is said and done.
There's a chance the next six months will indeed send investors for a wild ride. This especially holds true if there's negative news on the COVID-19 vaccine front. But if you build up some cash reserves, spread out your assets properly, and pledge to stay cool under pressure, there's a good chance you'll come away from our next market crash unscathed.