The stock market has experienced a record-shattering run over the past year. The S&P 500 is up nearly 70% since the market crashed in mid-March 2020, and it's been a wild ride for investors.
However, there's a chance the stock market is headed toward another correction. Some investors worry that this upward trend can't continue much longer, and the stock market bubble will burst soon. When that happens, stock prices could plummet, and we may experience a full-fledged market crash.
It's safe to say that the market will experience a downturn eventually -- after all, stock prices can't continue climbing forever. When, exactly, that will happen is anyone's guess, but it's a good idea to be ready no matter what happens. Here's how I'm preparing my finances for the inevitable downturn.
1. I'm keeping my emergency fund strong
Having a well-stocked emergency fund is always a good idea, but it's especially important during periods of stock market volatility. If you face an unexpected expense and you don't have an emergency fund, you may have no other option than to sell your investments to cover the cost.
However, when the market experiences a downturn, stock prices fall. If you sell your investments when prices are lower, you could end up losing money.
I generally aim to keep at least six months' worth of savings set aside in my emergency fund. This way, no matter what the market does, I don't have to tap my investments to cover any unplanned costs.
2. I'm continuing to invest consistently
It can be tempting to press pause on investing when the stock market is rocky. However, investing during market downturns can actually be a cost-effective move.
Because stock prices are lower during market downturns, it can be a good opportunity to buy good stocks at bargain prices. Even if you're investing in mutual funds or ETFs rather than individual stocks, you can still get more for your money during market downturns.
Instead of waiting until the market recovers to continue buying equities, it's a good idea to keep investing like usual, regardless of what the market does. If the stock market bubble does burst and stock prices take a nosedive, use it as an opportunity to load up on quality stocks without breaking the bank.
3. I'm maintaining a long-term outlook
Stock market crashes can be intimidating, but they're no cause for panic. Historically, the market has always recovered from every one of its downturns -- and it's extremely likely it will bounce back again if another crash is on the horizon.
If you maintain a long-term outlook, it's easier to avoid panic-selling when stock prices begin to drop. Remind yourself that the market will recover eventually, and you'll be able to ride out the storm.
The key to investing for the long term is to ensure you're investing in quality stocks or funds. Healthy companies with strong business fundamentals will be able to survive a market downturn, so their stock prices should bounce back. As long as you're putting your money behind strong investments, you should be able to get through even the worst market crashes.
As daunting as they may be, stock market downturns are quite normal. While nobody knows exactly what the future holds for the market, it's safe to assume that stock prices will fall sooner or later. By preparing for it now, you'll be ready for anything.