Though 2020 has been horrid for the U.S. economy, the stock market has hardly been doing poorly. While it did absolutely tank back in March when news of the pandemic broke, it's done a great job of recovering from those losses and rewarding patient investors who sat tight during that rough patch. In fact, the Dow Jones Industrial Average recently topped 30,000, a milestone for the index.
As such, there's really no reason to think that a stock market crash is imminent. Or at least most people may not be thinking that way. I, on the other hand, tend to err on the side of pessimism in these situations -- not because I'm a negative person, but because it helps me better prepare, and when I feel prepared, I feel empowered.
Image source: Getty Images.
Why might the stock market crash in 2021 when it's doing well now? Well, a couple of reasons. First, the pandemic is still raging, and once Joe Biden takes office, he may feel compelled to go to extreme measures to keep cases from multiplying. That could mean implementing a nationwide shutdown that hurts businesses and sends stock values plummeting.
Second, those vaccines we keep hearing about? A lot could still go wrong there. Distribution and storage could be a nightmare. Doses might get delayed. Just as positive news on the vaccine front has helped stocks soar, negative news is apt to have the opposite effect.
It's for these reasons that I'm gearing up for a potential market crash in 2021. And here are two simple things I'm doing to prepare.
1. Boosting my emergency fund
I always make it a point to have six to 12 months' worth of living expenses in the bank. Most people don't need quite as much cash on hand, but being self-employed, I like to be extra cautious. Despite having a healthy level of emergency savings already, I intend to pad my savings account in the near term for a couple of reasons.
First, having more cash on hand will give me the option to leave my investments alone if their value drops, thereby avoiding losses. But just as important, the more cash I have, the more discounted stocks I can buy if the market declines. Since much of my holiday plans are canceled this year (thanks, coronavirus), I plan to take the opportunity to bank some of the money I otherwise would've spent traveling or attending and hosting parties. (I'm not quite off the hook when it comes to buying gifts.)
2. Shifting things around in my portfolio
I'm a firm believer that a well-diversified portfolio can withstand a stock market crash better than a portfolio that's heavily concentrated in just a few stocks or sectors. That's why in the next week, I intend to examine my portfolio and see if I need to make any changes while stock values are still holding strong. I may opt to unload a few stocks and replace them with companies from a different market segment. Plus, I may decide to dump a few underperforming stocks now -- before their value drops further -- and capitalize on that loss from a tax perspective.
A little dose of pessimism doesn't hurt
It's unrealistic to think that the stock market will never crash again. Whether that will happen in 2021 is yet to be determined, but like the Boy Scouts, I prefer to always be prepared. Doing so buys me peace of mind, not to mention puts me in a stronger position to benefit from market downturns rather than get hurt by them.
