There are plenty of reasons to gear up for a stock market crash in the near term. Not only are stocks largely overvalued right now, but volatility has really kicked up in recent weeks. Throw in an ongoing pandemic and a shaky economy, and it's easy to see why some investors may be nervous.
The good news, however, is that you don't have to be a victim in the face of a stock market crash. Rather, you can set up your portfolio to sail through a downturn unscathed. In fact, these things could be your ticket to avoiding losses the next time the market takes a serious tumble.
1. The right asset allocation based on your age
Having an appropriate asset mix could spell the difference between making it through a stock market crash just fine and getting hurt. If you're years away from retirement, a stock-heavy portfolio won't hurt you as long as you pledge to leave your investments alone when things take a turn for the worse. But if you're near retirement, or already retired, you'll want a more even mix of stocks and bonds. Bonds are less likely to fluctuate in value during a market crash, so they can be used as a cash source if you need them to. Plus, you get some protection in the form of incoming interest payments.
2. A diverse mix of investments
A diversified portfolio could be your ticket to surviving a stock market crash. Your investment mix should, ideally, include stocks from a variety of market sectors -- healthcare, tech, banks, automobiles, and energy, just to name a few. You can achieve this by hand-picking individual stocks yourself, or by loading up on index funds or exchange-traded funds, which allow you to own a bucket of stocks with a single investment.
3. Dividend stocks
Companies that issue dividends have a tendency to keep paying, even during periods when the market declines. Holding dividend stocks in your portfolio buys you similar protection to what you'll get with bonds -- not in terms of investment values (which can still fluctuate), but in terms of having an extra income stream at your disposal.
4. Some excess cash to scoop up discounts
Stock market crashes are generally regarded as a bad thing, but in reality, they give investors a chance to score quality stocks on the cheap. That's why it pays to keep some extra cash in your brokerage account -- so you can add to your portfolio with ease when stock values tumble. Remember, if the stock market crashes, there's a good chance it will be followed by a rally -- that's how things have historically played out. The key is to invest during that sweet spot -- when stock values are down and haven't yet begun to climb back up.
The idea of a stock market crash can be daunting, but if you set up your portfolio appropriately, the next one doesn't have to hurt you. In fact, if you play your cards right, you can use the next market downturn to your financial advantage and come away even wealthier in its wake.