After nearly two years of phenomenal growth, the S&P 500 entered correction territory after it fell more than 10% from its peak in early January.
Dips like this can be intimidating, as it could mean that a crash is looming. There are several factors that could lead to increased market volatility, including soaring inflation interest-rate increases from the Federal Reserve later this year.
To be clear, nobody can say for certain whether the market will crash. But it never hurts to start preparing your portfolio for the worst just in case. If there is a downturn on the horizon, you can make a few investment moves to protect your money.
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1. Double-check that your portfolio is diversified
A diversified portfolio is key to surviving market downturns. If all of your money is behind one or two stocks and those investments don't survive a crash, that could wreak havoc on your finances. But if your cash is spread across a wide variety of investments, you're more protected.
Just how diversified your portfolio should be will depend largely on your investing style and risk tolerance.
If you're investing in individual stocks, aim to invest in at least 25 to 30 stocks from multiple industries. If you're investing in exchange-traded funds (ETFs) or mutual funds, double-check that there's at least some variety in your portfolio. One ETF may contain hundreds of stocks, for example, but if they're all from the same industry, that won't provide as much diversification.
Your risk tolerance will also affect your strategy. If you're a risk-averse investor, you may choose to diversify further. Although it is possible to over-diversify, more stocks in your portfolio generally results in lower levels of risk.
2. Make sure your emergency fund is fully stocked
It's wise to leave your investments alone regardless of how the market is performing, but it's especially important during downturns.
When the market is in a slump, it's best to avoid pulling your money out of the market if at all possible. Stock prices are lower during downturns, and if you sell your stocks, you could end up selling your investments for less than what you paid for them.
For this reason, it's wise to make sure you have an emergency fund with enough savings to cover at least three to six months' worth of expenses. This way, if the market takes a turn for the worse and you face an unexpected expense, you won't risk selling your investments and losing money.
3. Make a list of potential stocks to buy
While market downturns may not be the best time to sell, they are a fantastic opportunity to buy. Because stock prices are lower, the market is essentially on sale. The more the market falls, the more affordable it is to invest in high-priced stocks.
However, it's still crucial to do your research before you buy. It can be tempting to load up on low-quality stocks simply because they're more affordable, but a bad investment is a bad investment -- regardless of how much or little it costs.
It's a good idea, then, to make a wish list of stocks you'd like to buy if their prices drop. Do your research ahead of time so you know they're solid investments, then if prices continue falling, you can snag those stocks for a potentially steep discount.
Stock market downturns can be daunting, but they're normal and only temporary. By preparing your portfolio now, you'll come out the other side even stronger once the market inevitably recovers.
