Will the stock market crash in 2021? Without a crystal ball, we just don't know.
But what we do know is that we're starting off the new year in the midst of a global pandemic, and that alone could be a source of volatility. Furthermore, we don't what lockdowns may ensue as the nation tries to get the coronavirus outbreak under control and how those restrictions could impact the market. Plus, while strong stock values are a good thing to a point, many of the companies trading today are simply overvalued, and the market is apt to eventually correct for that.
It's for all of these reasons that it's crucial to prepare for the possibility of a stock market crash at some point in 2021 -- and to have a game plan in case that happens. Here are three things it pays to do if stocks indeed tank.
1. Stay calm
Many investors lose money during stock market downturns as a result of sheer impulsiveness. While it's easy to panic when your portfolio value takes a hit, remember that stock market crashes are often temporary. Just think about the bear mark that hit back in March, during which time stocks lost a good 30% of their value. The market bounced back well before the end of 2020, and that was during a pandemic. As such, a stock market crash shouldn't lead you to assume that you'll be in for a multiyear recovery, so you shouldn't lose your cool if stocks take a transient hit.
2. Don't sell investments unless you absolutely need the cash
You only lose money in stocks when you sell off investments for less than you paid for them. If the stock market crashes next year, there's really no reason to unload investments unless you desperately need the cash -- and you can avoid that scenario by amassing a solid emergency fund ahead of time.
3. Use spare cash to scoop up discounted stocks
Stock market crashes are generally regarded as a bad thing, but that doesn't have to be the case. When stock values decline, investors have an opportunity to buy up quality stocks on the cheap. And that's precisely what you should plan to do next year if things go south.
Put together a wish list of stocks you want to buy but are too expensive for you at present. That list can include stocks you already own, as well as stocks you've yet to add to your portfolio.
That said, don't touch your emergency fund during a downturn to buy discounted stocks. That cash should be there to cover unplanned expenses or a period of unemployment. Rather, try to stockpile some extra cash in advance so that if stock values fall, you'll be able to pounce.
The idea of a stock market crash in the near term may be unsettling, and to be clear, there's no guarantee that will happen in the coming year. But it's best to be prepared for that possibility, nonetheless. If 2020 taught us anything, it's that life has a way of surprising us, and not always for the better, so when it comes to the stock market, it's never a bad idea to hope for the best but plan for the worst.