Will the stock market bubble burst in 2021? We just don't know.
There are numerous factors that could spur the perfect storm for a market crash within the next 11 months. For one thing, stocks are extremely overvalued right now, and that's something that's likely to, at the very least, lead to a market correction. Furthermore, if coronavirus variants become more dominant before enough of the public gets a vaccine, strict lockdown measures could ensue that hurt the economy and send stocks reeling.
As such, we all need to prepare for the possibility that stock values could plummet at some point this year. And if that scenario comes to be, here are three big mistakes you'll want to steer clear of.
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1. Panic selling
It's very unsettling to see your portfolio value drop overnight. But one thing you must remember about stock market crashes is that you don't lose any money unless you actually sell off investments when they're down. If you sit tight and do nothing, all that will happen is that the account balance you see on your computer screen will be lower than what it was a few days prior. The stock market has a long history of recovering from downturns, even prolonged ones. If you keep your cool and ride things out, you'll emerge unscathed.
2. Not scooping up bargain-priced stocks
You might think that it's wise to stay far away from the stock market when investment values across the board are down. But actually, that's a great time to go shopping for stocks on the cheap. A company whose shares you've had your eyes on for a while could suddenly become 20% or 30% less expensive to buy. That's an opportunity you don't want to miss. A stock market crash could also be a great time to add index funds to your portfolio for extra diversification.
3. Liquidating investments before tapping your emergency savings
There's a reason we're all supposed to stash three to six months' worth of living expenses in the bank. You never know when an emergency situation might arise that requires you to spend money your paycheck can't cover. If you have an emergency fund and need money during a stock market crash, that's where that cash should come from -- not your stock portfolio. Some people do everything in their power to avoid tapping their savings because mentally, dipping into that account is unsettling. But remember, the whole point of an emergency fund is to enable you to leave your portfolio alone when stock values take a dive, so don't tap your investments until you're really out of money in your savings account.
When the stock market takes a turn for the worse, it's easy to get down or scared and stop thinking rationally. That's why it's actually a good idea to prepare for a near-term market crash. If that doesn't happen, great. But if it does, you'll know what mistakes to avoid so you can come out of that situation as financially healthy as possible.
