Please ensure Javascript is enabled for purposes of website accessibility

Worried Stocks Are About to Crash? Here's How to Get Ready.

By Maurie Backman - Mar 10, 2021 at 5:47AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Our next market downturn could happen soon. Gear up for it before it's too late.

It's been a volatile couple of weeks in the stock market, and while that's technically nothing unusual, it's also reason enough to make many investors uneasy. In fact, given the backdrop we're looking at -- a raging pandemic, a sluggish economy, and the fact that stocks are generally overvalued -- it's not unreasonable to think a full-blown crash is imminent. But rather than let that become a source of panic in your world, a better bet is to set yourself up so you're ready for that eventuality. Here's how.

1. Boost your emergency fund

Let's be clear on one thing -- the only way to lose money in a stock market crash is to actually sell investments when they're worth less than what you paid for them. If you don't make a move, you won't lose any money -- it's that simple. But what if you need money in a pinch at a time when the market is down? If you're forced to liquidate investments to drum up cash, you could end up locking in serious losses.

Man in dress shirt and tie at computer covering his face

Image source: Getty Images.

Having an emergency fund, however, can spare you that fate. If you retain enough money in savings, you'll have the option to leave your stock portfolio alone the next time the market nosedives.

How much cash should you have on hand? Ideally, enough to cover at least three months of bills, though if you can do a bit better, it wouldn't hurt to aim for six months' worth of expenses. If you're behind on emergency savings, start diverting your spare cash into that account so it looks nice and healthy -- and buys you the option to leave your portfolio untapped when the market tanks.

2. Diversify your holdings

While we could be headed for a stock market crash, so far that hasn't happened -- which means it's not too late to dump some stocks and swap them for different ones that lend to better diversity. As a general rule, loading up on stocks from a single market segment, or just a couple of segments, is a dangerous move. For example, if you keep 90% of your portfolio in tech stocks, but tech stocks crash, your portfolio value will sink. A better bet is to spread out your holdings so you've got some money in tech stocks, but also, money in bank stocks, energy stocks, healthcare stocks, and so forth.

If you're looking for a quick way to add some diversity to your portfolio ahead of a crash, consider adding some exchange-traded funds. These funds let you buy up a bucket of stocks with a single investment. They're convenient and extremely easy to vet.

3. Make sure you have the right stock allocation for your age

Though bond values can fluctuate, they don't tend to move as rapidly as stock values, which have the potential to plummet overnight. That's why it's crucial to make sure you're not overly invested in stocks. As a general rule, money you expect to need within seven years should not be put into stocks. As such, if you're a few years away from retirement, you may want to go more conservative and swap some of your stock investments for bonds if they comprise the bulk of your portfolio.

Stock market crashes happen frequently enough that you'd think any seasoned investor would be used to them by now. But even investors with years of experience under their belts can get thrown easily when stock values sink across the board. We don't know exactly when the next market crash is coming, but it could happen soon, so do yourself a favor and set yourself up to get through it. These simple moves could not only help you avoid a world of stress, but spare you serious losses in the near term.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
331%
 
S&P 500 Returns
115%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 05/21/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.