The stock market has soared to kick off 2021 despite some investors worrying we'd see declines early on in the year. But the big question remains: How long can this rally keep going? Given the way stocks on the whole are extremely overvalued right now, it's pretty much inevitable that at some point, our current bubble is going to burst. It may happen in February, March, or even beyond, but current trading levels really aren't sustainable.
I'm anticipating a market crash at some point during the first half of 2021. However, I'm also not really stressing over it. Instead, I'm taking these steps to prepare.
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1. Boosting my emergency savings (but only a little)
I'll be fully transparent and say that I already have about a year's worth of living expenses tucked away in my savings account. (An aggressive target, some might say, but that's where my comfort level is.) As such, I don't plan to boost my emergency fund substantially in the coming weeks or months, because I'm already pretty well protected. At the same time, though, I'm naturally cutting back on expenses during the pandemic because, let's face it, there's really nowhere safe to go, and so many of the things I'd normally spend on are off the table right now. Given the ease at which I'm freeing up cash, I'll put some of it into savings for a small touch of added protection and the rest into my brokerage account so that when buying opportunities arise, I'll be ready.
2. Putting together a new stock watchlist
There are a number of stocks I've been interested in adding to my portfolio for several months whose prices are currently too high for my appetite. I'd like to wait for those share prices to come down before diving in. At the same time, I've slowly but surely been adding stocks to that list in an effort to diversify my portfolio.
3. Continuing to fund my retirement plan
A stock market crash shouldn't stop you from continuing to invest, and I'm certainly not planning to let it stop me. My goal this year, as it's been for many years, is to max out my retirement plan, and to do that, I need to keep funding and investing consistently during the year. I may opt to buy more index funds in that plan if the market tanks, because that way, as stock values start to come back up, I'll benefit from a broad recovery.
What's your stock market crash strategy?
One thing we all need to remember about the stock market is that downturns are normal and to be expected. So the question is: What will you do to prepare for the next market crash? That crash may not happen for months, or it could be right around the corner, but the best way to protect your wealth during a downturn is to have a strategy in advance. That way, you'll be less likely to panic when stock values decline and make rash decisions that cause you to lose money unnecessarily.
