A stock market crash may not make for a great horror movie, but it's a nightmare for many investors. It's not just about losing money. It can also mess up your long-term goals and threaten your future financial security. But this doesn't have to happen. If you take the following steps, you should be able to weather a market crash without too much difficulty.
Ensure you're diversified
Lack of diversification is a legitimate reason to be concerned about a potential market crash. If you only have your money in a handful of stocks, there's a higher probability of significant loss, especially if all your stocks are in a single market sector.
Image source: Getty Images.
Ideally, you should have your money in at least 25 different stocks, and these stocks should be in a few different sectors. This ensures that all your assets don't take a hit if a major issue affects a single industry.
If you don't feel comfortable picking stocks, you can always opt for an index fund instead. These are bundles of stocks you buy together, and they're designed to mimic a market index. They're some of the cheapest investments out there and they instantly diversify your money among hundreds of companies. This makes them a popular option for beginning and experienced investors alike.
Remind yourself of your long-term goals
Short-term losses can be stressful, and they can make some investors think that they're doing something wrong. But the truth is, ups and downs are a natural part of investing. Even the best investors lose money sometimes, but they know when to sell and when to stay the course.
If you have a diversified portfolio and you feel confident that you've chosen strong companies that will still be profitable in a few decades, often the best thing for you to do in a market crash is nothing. Remind yourself that you're investing for the long term and these short-term fluctuations don't mean that much in the scheme of things.
If it helps, avoid checking your portfolio more than once or twice per year. For some people, checking it more often than this can tempt them to make emotional decisions that end up costing them in the long run.
Use dollar-cost averaging
Dollar-cost averaging is an investing strategy where you invest a regular sum of money on a schedule. For example, you might invest $100 every week or $500 every month. You decide what works the best for you. The point is, it's automated. Once you have a schedule set up, you don't have to think about it or even check your portfolio.
This is the strategy you use with your 401(k), whether you know it or not. Your employer withholds a specified amount of money from your paycheck and deposits it into your 401(k) where it's invested in the securities you've chosen.
You can do the same thing with other investment accounts too. Many enable you to link a bank account so funds are automatically transferred on a specific schedule. Check with your account provider if you're unsure how to set this up.
This hands-off investing approach is a great choice for those worried about a market crash because you don't have to try to time the market. Sometimes, you'll invest when prices are high and you won't be able to buy as many shares. But other times, you'll invest when prices are low and you'll get more shares. In the end, it'll all balance out and you'll end up paying a fair price for your shares.
Another advantage to dollar-cost averaging is that you don't have to worry about forgetting to invest. Once you've got your automatic deposits set up, you don't have to do anything else. Just make sure the transfers are set to take place when you have adequate funds in your bank account, like right after you get paid, to avoid an overdraft.
There isn't anything you can do to make yourself impervious to market crashes, but if you follow the three steps above, you shouldn't have too much to fear from them. Just stick to your plan and know that the market will recover eventually.
