As the stock market continues to fall, many investors are concerned about whether it could lead to a full-blown recession. The S&P 500 is down around 23% since its peak in early January, and the Nasdaq has fallen by just over 30% in that time frame -- both firmly in bear market territory. The Dow Jones Industrial Average also entered a bear market for the first time since 2020, which has amplified some investors' concerns.
To be clear, nobody knows for certain whether a recession is looming. But regardless of what happens, there are a few things the smartest investors are doing that can help you keep your money safe.
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1. Diversify your portfolio
Now is a fantastic opportunity to double-check that your portfolio is properly diversified. Stronger companies are far more likely to survive a recession or market downturn, but not all stocks will pull through tough economic times. If you're putting all your money behind a small number of stocks and even one of them doesn't survive, you could potentially lose a lot of money.
With a well-diversified portfolio, though, your investments are more protected. Even if one or two of your stocks don't bounce back from a recession, it won't sink the rest of your portfolio.
There's no hard rule as to how many stocks you should own, but a good guideline is to have at least 20 to 30 stocks from multiple industries. The more risk-averse you are, the more variety you should have in your portfolio. Just be sure you're not over-diversifying, as that could potentially limit your earnings.
2. Keep a long-term outlook
It's easy to feel discouraged about the market right now. But keep in mind that all slumps are temporary, and no matter how bad things get, the market will improve eventually.
In the last two decades alone, we've seen some nasty downturns -- from the dot-com bubble to the Great Recession to the brief (but nerve-wracking) crash in the early stages of the COVID-19 pandemic. And in every single instance, the market not only recovered, but also went on to see significant growth.
It's not always easy to stay focused on the long term, especially if the market falls further in the coming weeks or months. But so far, every single bear market in history has given way to a bull market -- and it's extremely likely the same will happen with this downturn.
3. Take advantage of this buying opportunity
While it may not seem like it, right now is a fantastic buying opportunity. Stock prices are lower than they've been in months, which means now is your chance to load up on quality investments at a steep discount.
Of course, not everyone can afford to invest right now, and that's OK. It's wise to only invest money you can afford to leave in the market for at least a few years, so if your finances are tight right now, it may be best to hold off on buying more stocks.
If you can swing it, though, investing now could be a profitable move. By investing when the market is at a low point, you can set yourself up for significant returns when stock prices inevitably recover.
It's not always easy to invest in times like these, but this is one of the best ways to potentially make a lot of money in a relatively short period of time. For example, if you had invested in the S&P 500 in March 2009 -- at the lowest point of the Great Recession -- you would have seen returns of nearly 70% over the following year alone.
Market downturns and recessions are not easy, but you can still make the most of them. With the right strategy, it's possible to both protect your investments and maximize your earnings.
