If you're invested in the stock market, you may be worried about signs of an impending crash.
For many investors, however, there's no need to be concerned about this possibility. That's because crashes are inevitable, they are part of natural market cycles, and are inevitably followed by recoveries. But not everyone is invested in a way that enables them to weather a crash and come out better off in the end.
So how can you tell if your portfolio is especially vulnerable to a downturn that you might not easily recover from? Just watch for these three red flags.
1. You've invested money you'll need very soon
Sometimes, recoveries happen quickly. In other situations, they'll take years. If you have money in the market that you will need within the next few years, there's a chance that you won't be able to wait out a recovery.
You could be forced to sell your stocks in the middle of a market crash, thus locking in losses that you could've recovered from if you had more time. Unless you can afford to leave your money alone for at least two years, it doesn't belong in the market.
2. You are overinvested in stocks given your age and risk tolerance
The older you get, the less risk you should be taking on. There are two reasons age affects your asset allocation.
One, you might have to start relying on your money soon to fund your retirement (especially if the market crash is also accompanied by a major economic downturn that prompts early retirement due to unemployment).
And two, you have less time to recover if things go badly wrong. A young person who suffers outsize losses could correct the situation over time. But if you're toward the tail end of your career and you have your entire portfolio in risky stocks that you lose a lot of money on, you could be in real trouble.
3. You haven't invested for the long term
If you were hoping to invest to make a quick profit, a market crash could destroy that opportunity and leave your portfolio in shambles. If you aren't confident that the companies you're investing in could weather an economic downturn and come out stronger in the end, then you shouldn't be investing in them.
The quick gains you were hoping for might not come if the market crashes. Instead, you could find yourself forced to either sell at a big loss or hold on to a stock you don't have confidence in through turbulent economic times.
Chasing short-term profits makes investing much riskier, especially in a volatile market, which is one big reason Warren Buffett has cautioned that you shouldn't hold a stock for 10 minutes unless you'd be happy holding on to it for 10 years.
The reality is that a market crash is coming -- if not this month or this year, then someime in the future, because crashes always come.
If your portfolio is made up of stocks you bought without taking the long view, if it's too heavily concentrated in high-risk investments, or if it's full of money you'll need imminently, that crash could be a disaster for you instead of just a minor bump in the road that you recover from over time. Don't let that happen to you.