Before we know it, 2021 will be here, and with any luck, it will bring some good news with it (like an end to the pandemic). But we don't know what 2021 has in store for the stock market, and while investment values could hold steady in the new year, we can't discount the possibility of a stock market crash. That's why it's important to prepare for a number of different scenarios in the coming year, and here are some tips for doing just that.
1. Keep it simple
Investing can be a time-consuming process, but it doesn't have to be. If you don't know how to research stocks or are too overwhelmed by the idea, stick to index funds. Index funds let you buy a bucket of different stocks, and their goal is to match the performance of the market indexes they're associated with. As such, if you were to buy shares of an S&P 500 index fund, you'd effectively be investing in the broad market without having to do any significant amount of legwork.
Image source: Getty Images.
2. Make sure your portfolio is diverse
A diverse portfolio can help protect you in the face of volatility, so your goal should be to load up on stocks from a range of market segments. And if that's too complicated, once again, index funds get the job done. Of course, you may want to expand your horizons beyond the world of stocks. Bonds, though more conservative, could be a reasonable addition to your portfolio, as could real estate, whether in the form of physical properties or REITs.
3. Allocate your assets appropriately for your age
An overly aggressive portfolio isn't the best thing to have when you're right on the cusp of retirement. Similarly, a bond-heavy portfolio is generally way too conservative if you're in your 20s and can take on more risk. At the start of the year, see how your assets are allocated and make sure your strategy makes sense given your age.
4. Have plenty of cash on hand
Stocks could be volatile in 2021 as the nation grapples with the pandemic. That's why it's smart to have a healthy sum of cash at the ready. First, having solid cash reserves will help you avoid having to liquidate investments at a loss when you need money. Furthermore, if stock values fall, you'll have a prime opportunity to buy -- but only if you actually have enough cash on hand.
5. Think long-term
In the coming year, you may need to make a number of specific investing decisions. But ultimately, your choices shouldn't hinge on what you think is best over those 12 months. Rather, the moves you make in 2021 should tie into your long-term strategy. As a general rule, you stand to make money in your portfolio by buying quality investments and holding them for years, so think in terms of decades, not months.
Nobody knows what 2021 has in store, so your best bet as an investor is to be prepared for anything. These tips will help you navigate the upcoming year, all the while setting yourself up for long-term success.
