Please ensure Javascript is enabled for purposes of website accessibility

These 3 Moves Could Help You Come Out a Winner in the Next Stock Market Crash

By Maurie Backman - Jun 12, 2021 at 6:18AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Stocks could soon take a dive. Here's your game plan to avoid getting hurt -- and potentially come out ahead.

For months, there's been talk of an imminent stock market crash. Not only has inflation been causing some market volatility, but the S&P 500 index is, on the whole, largely overvalued at this point.

Now without a crystal ball, it's impossible to know when the market will tank. And to be clear, it could happen quickly, without warning.

The key, therefore, is to be prepared for that possibility at all times. Here are a few essential moves that could help you emerge victorious the next time stocks take a tumble.

Smiling person at laptop

Image source: Getty Images.

1. Having a fully loaded emergency fund

The only way to lose money in a stock market crash is to liquidate investments when they're down. Leave your portfolio alone, and you won't lose a dime. And if you load up on emergency savings, there shouldn't be a real need to tap your investments when a need for money pops up.

Unplanned expenses can happen at any time, and you might also lose your job out of the blue. If you have money in the bank to cover those scenarios, you won't have to touch your investments, which means if their values sink, you'll come out unscathed.

As a general rule, it's smart to have three to six months of living expenses on hand for emergencies. Some people feel more secure having a little extra. Figure out what sum works best for you and run with it, keeping in mind that three months' worth of bills should really be your minimum savings target.

2. Stockpiling cash

When stock values fall, it gives investors a prime opportunity to add to their portfolios on the cheap. But to do that, you need money.

That's why it pays to hoard some cash in advance of a stock market crash. To be clear, that cash shouldn't come out of your emergency savings. Rather, you should have a separate pile of money on hand so that if a stock on your watchlist starts trading at a lower cost, you can scoop it up quickly.

3. Having a diverse portfolio

Having a wide range of investments can help you get through a stock market crash. But that doesn't just mean that if you own 10 different stocks, you're all set.

Within your stock holdings, make sure you're invested across a few different market segments. That means, for example, owning some energy stocks, some bank stocks, a couple of auto stocks, some healthcare stocks, and so forth. Owning 10 tech stocks and nothing else isn't a good bet.

Also, don't just load up on stocks. Real estate investment trusts, or REITs, are a great supplement to stocks because their value doesn't always rise and fall in conjunction with the broad stock market.

A stock market crash can be a scary thing. But it doesn't have to be. We don't know exactly when the next downturn will hit, but if you go in prepared, you'll be more likely to come out a winner. Just as importantly, you'll help yourself avoid the stress so many investors experience when market conditions take a turn for the worse.

The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 08/18/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.