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Worried About a Stock Market Crash? 4 Ways to Be Ready

By Catherine Brock - May 29, 2021 at 8:09AM

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Preparing for a bear market is easier than you think.

Stocks are under pressure from inflation fears, and it may have you worried about an impending crash. Sadly, there's no investor crash helmet available to protect you from turbulent markets. But there are other ways to prepare for rough times ahead.

To be clear, I'm not predicting the market will crash this month or this year. I can freely admit I'm terrible at market forecasting. For that reason, I'm sharing four crash readiness strategies that don't involve selling out, taking short positions, or doing anything that'll backfire if a crash doesn't materialize.

1. Check your cash supply

A stock market crash stings most when you need to liquidate. Selling an asset at a loss is universally unpleasant. And the feeling is compounded if the market rebounds in short order and you're not positioned to benefit.

Person researching charts on phone and laptop.

Image source: Getty Images.

A healthy cash supply on hand is your first line of defense. If the market crashes and you lose your job the next day, hopefully your cash can keep you afloat until you replace your income. At a minimum, the cash will reduce your reliance on liquidations and buy you some time to participate in the market recovery.

Experts recommend having enough cash to cover three or more months of living expenses. If you don't have that amount today, you have tough choices to make. You can liquidate some of your portfolio now, knowing that you may miss gains if investors turn optimistic. You could sell a different asset. Or you could cut back your living expenses to the essentials temporarily and save to your cash fund.

2. Review your speculative positions

The small-caps and speculative plays in your portfolio often get hit the hardest in a crash. Some of this is an outcome of investor perception. When the market gets dicey, many investors will shift out of their speculative positions and into trusted, defensive names like Procter & Gamble ( PG 1.34% ) or McDonald's ( MCD 2.21% ). That trend naturally puts downward pressure on smaller company stocks.

Investors make this shift because smaller companies tend to struggle more in difficult business climates. They may not have the leadership experience and access to capital they need to manage seamlessly through revenue declines or rising expenses.

Review your portfolio and identify which positions present the most risk in a downturn. If they collectively account for more than 5% of your portfolio, consider lowering your exposure.

3. Rebalance

The S&P 500 ( ^GSPC 0.96% ) has grown more than 41% in the last 12 months. If you haven't rebalanced your portfolio lately, you are probably overweighted in stocks. That's not where you want to be heading into an uncertain market.

You should reevaluate your investment plan at this time, too. Rebalancing to an asset allocation that reflects your outlook from five years ago isn't terribly useful. You are older and possibly more risk-averse now versus even one year ago. Redefine your target asset mix based on your situation today, and then rebalance accordingly.

4. Look for opportunity

A stock market crash creates opportunity to buy good stocks at lower prices. For that reason, your readiness plan should include offensive moves as well as defensive ones. Start researching stocks you'd like to buy in a crash and make your wish list.

You'll likely find that focusing on the opportunity is a game-changer emotionally. Instead of waiting anxiously for your assets to lose value, you can anticipate how strong your portfolio will be on the other side. You might even feel a twang of disappointment if the market finds its footing and returns to growth.

Ready for anything

The market crashes sometimes, and there's no headgear to protect you. Accepting those facts as unavoidable is a big step in readying yourself for whatever happens next. If you are eager to take action too, add to your cash stores and then review and rebalance your portfolio.

You can also put some energy into window shopping for stocks. That way, if there is a crash, you'll be ready to take advantage.

 
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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Stocks Mentioned

McDonald's Corporation Stock Quote
McDonald's Corporation
MCD
$254.85 (2.21%) $5.52
S&P 500 Index - Price Return (USD) Stock Quote
S&P 500 Index - Price Return (USD)
^GSPC
$4,582.01 (0.96%) $43.58
The Procter & Gamble Company Stock Quote
The Procter & Gamble Company
PG
$151.89 (1.34%) $2.01

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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