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.
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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.
