Last week was a wild one for investors, and as we approach the latter part of 2021, a lot of people may be worried about a near-term stock market crash. The reality is that it's impossible to predict when our next downturn will occur. And to be clear, there's no reason to think that the market will plummet before 2021 comes to a close.
That said, stocks have been overvalued for a long time, and we are in the midst of a pandemic. And the economic situation is also far from stable.
While we've recovered a lot of jobs since the COVID-19 outbreak took hold, the national unemployment rate is still considerably higher than it was before the pandemic began. And in recent weeks, newly filed jobless claims have come in at higher levels than what we were seeing over the summer.
All told, it's hard to say how well or poorly stocks will fare in the near term. But if you want to protect yourself from taking losses during a potential bout of turbulence, there's one important move you need to make.
Set yourself up with a cushion
You don't lose money during a stock market crash if you don't sell off investments when they're down. So, if you keep your portfolio untouched, it won't matter how much its value fluctuates week to week or month to month.
It's not unheard of to liquidate investments when a need for cash arises. But if you make a point to stockpile enough cash in the bank, you won't have to turn to your portfolio when expenses come your way. And that means you won't be forced to sell off stocks at what could end up being a really bad time.
As a general rule, it's a good idea to have enough money in the bank to cover three to six months of living expenses. Doing so can buy you some protection in the event of a lost job or a string of unplanned expenses, like home repairs, that can't be put off.
If you don't have enough money in savings to cover at least three months of bills, consider cutting back on near-term spending and boosting your cash reserves. That way, if stocks do end up tanking later on in the year, you won't be forced to sell at a low in an effort to scrounge up cash.
Of course, right now, the interest you'll get on the money you keep in the bank is negligible. And so you may be hesitant to overfund your emergency savings. But erring on the side of caution with your savings could prevent losses in your investment portfolio, so there's definite value to having a nice cushion.
Though stock market crashes are normal, they're also far from fun. We don't know if the market will experience a massive decline during the final quarter of the year. But one of the best things you can do to protect yourself from that possibility is amass a solid pile of savings.