Will the stock market crash in 2021? Early this year, it seemed like it would by virtue of the fact that there was still a pandemic raging, the rollout of COVID-19 vaccines was going more slowly than expected, and stocks in general just seemed overvalued.
Fast-forward to the end of April, and while things may be improving on the pandemic front and vaccines have certainly become more widely available, stock values are still exceedingly high. And that means a crash could be coming. But if you play your cards right, even a significant market downturn won't have to hurt you at all. Here are three things you can do to make it through the next one -- whenever it comes.
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1. Remind yourself that downturns are normal -- and historically, temporary
Crashes, corrections, and bear markets are no fun for investors, but they're also not that rare. In 2020, stocks plunged sharply when it became clear that the coronavirus outbreak was on its way to becoming a pandemic. But look what happened next. The market recovered well before the year came to a close. If you keep reminding yourself that downturns actually happen quite frequently -- but that the general long-term trend for the U.S. market has always been upward -- you may grow more comfortable with the idea of short-term turbulence. That alone could help you avoid making rash decisions like dumping your beaten-down investments at the wrong time.
Some market downturns last longer than others. But remember, those crashes have always proven temporary. So push yourself to hold onto your stocks and wait the next one out -- even if it drags on.
2. Have plenty of emergency cash at the ready
Waiting out a stock market crash becomes easier when you aren't in a position where you really need to liquidate investments to free up money. If you want to get through a market downturn unscathed, build yourself a solid emergency fund -- ideally, one with enough money to cover about six months' worth of living expenses. That way, even if the next market crash is accompanied by economic problems that interfere with your ability to earn a living, you won't feel compelled to sell shares and lock in losses in the process.
3. Have a diverse portfolio that's age-appropriate
The more diversified your portfolio is, the less exposed you are to troubles that hit individual companies, industries, or sectors. In the same vein, diversification means you're better positioned to ride the wave of recovery that generally comes after the stock market tanks. For this reason, you should aim to own at least a dozen different stocks spread across multiple market segments. Or, you could load up on broad index funds and exchange-traded funds, which give you instant diversification with a single investment.
At the same time, though, if your portfolio is heavy on stocks, make sure you're in a financial position where you won't need to touch those assets for at least seven years. If you expect you'll need to start drawing down on your portfolio sooner than that -- for example, if you're planning to retire in a few years -- then you generally shouldn't have 80% to 90% of your investments in stocks. As you approach that stage of life, you'll want to start gradually shifting a significant share of your assets into safer investments like bonds, which will give your portfolio some stability even during a stock market crash.
We can't know when the next big Wall Street downturn will happen, and it may not be this year. But at some point, stock values are going to plunge again, and it's important to be ready -- financial, mentally, and emotionally -- when they do.
