The stock market has been rocky lately, experiencing a rollercoaster of ups and downs over the last few months. Recently, the S&P 500 officially entered correction territory after falling more than 10% since the beginning of the year.
Stock market corrections don't always lead to crashes, but it is possible. Does this mean the market is due for a crash in the near future?
How likely is a stock market crash?
Uncertainty can sometimes result in greater market volatility, and there is a lot of uncertainty in the world right now. Between the ongoing war in Ukraine, increasing inflation, and an uptick in COVID-19 cases, there are several factors that could affect stock prices.
Whether those factors will result in a market crash, though, is anyone's guess. The stock market can be unpredictable, and even the experts can't say exactly how it will perform over the coming weeks or months.
That said, there is a good chance that the market will fall eventually. After all, stock prices can't continue increasing forever. Sooner or later, we'll have to experience some sort of downturn. When that will happen or how severe it will be, however, nobody knows.
While it's unclear what will happen with the market, that doesn't mean you can't prepare. By taking the right steps now, you can keep your investments safe regardless of what the market does.
1. Solidify your emergency fund
It's always wise to have at least six months' worth of savings stashed in an emergency fund, but it's even more important when the market is volatile.
When the market drops, stock prices are lower. That makes downturns a particularly bad time to sell your investments, because you may end up selling for less than you paid for them. When you have an emergency fund, though, it's easier to avoid tapping your investments if you incur an unplanned expense.
2. Diversify your portfolio
While most stocks will eventually recover from a market crash, not all of them will. A diversified portfolio ensures you're not putting all your eggs in one basket, making it more likely that your investments will survive a downturn.
Exactly how many stocks you should own will depend on your personal preferences, but most experts recommend owning at least 25 to 30 stocks from a variety of industries. This way, if one or two of your stocks don't recover from a downturn, it won't wreck your entire portfolio.
3. Stay focused on the long term
Stock market downturns are daunting, but they're also temporary. Severe crashes could potentially lead to bear markets that last months or even years, but stock prices will recover eventually.
By keeping a long-term outlook and focusing on the market's performance over years, it will be easier to avoid getting hung up on short-term volatility.
That's often easier said than done, but keep in mind that the stock market has a 100% success rate when it comes to surviving crashes. While there are no guarantees when investing, it's extremely likely the market will recover from any future crashes as well.
No one can say for sure when the market will crash again, but it's likely there will be a downturn at some point. By taking these steps to prepare, however, you can keep your investments as safe as possible.