Please ensure Javascript is enabled for purposes of website accessibility

Worried About a Stock Market Downturn This Year? Here's What to Do

By Maurie Backman - Updated Jan 24, 2020 at 9:12AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

You don't need to live in fear of a major market decline; you just need to be prepared.

Anyone who's been following the stock market lately knows it's been a killer year so far. But that doesn't mean things can't take a turn for the worse.

Stock market downturns are somewhat inevitable, and corrections, where the market loses 10% of its value or more, are relatively common. In the past 70 years, in fact, the S&P 500 has seen 37 of them.

The good news? Downturns can be relatively short-lived, and most of the aforementioned corrections resolved within less than four months. What you really need, therefore, is a strategy to ride out the next storm, and here's how to do just that.

Man, with a nervous expression, holding hand to mouth while looking at laptop.

IMAGE SOURCE: GETTY IMAGES.

1. Have a solid emergency fund

The one thing you need to remember about a stock market downturn is that you don't lose money until you actually sell your investments at a loss. Imagine you buy a given stock at $90 a share, and its value drops to $60 per share when the market tanks on a whole. On paper, you're out $30 per share you own. In reality, you're out nothing unless you actually unload those shares at a lower price than what you paid for them.

What does that have to do with emergency savings? It's simple. If you have adequate cash reserves on hand, you won't be compelled to sell your investments at a loss when the need for money arises. And if you leave your portfolio alone, there's a very high likelihood it will regain its value in due time.

Ideally, you should have enough money in emergency savings to cover three to six months of essential living expenses. If you're really worried about a stock market crash, aim for the higher end of that range. And to be clear, that money should sit in a savings account to ensure that it can't lose value and is easily accessible to you.

2. Have some extra cash on hand to invest

A stock market downturn is generally considered a negative event -- but actually, if you play your cards right, it could turn into a solid opportunity to make some money. The reason? If you have cash on hand, you may get to buy some quality stocks on the cheap.

Let's go back to our example. You bought Company X at $90 a share and now it's worth $60, not because that company missed earnings projections or got wrapped up in a scandal, but rather, because the market on a whole is down. If you were to scoop up some additional shares of that stock at $60 apiece, there's a good chance they'd eventually climb back up to $90 or above, at which point you stand to gain.

That's why it pays to set aside additional funds to buy stocks when the market is down. That money, however, should be separate from the funds you earmark for emergencies. If you tap your emergency savings to buy stocks at a bargain but then lose your job three weeks later or encounter another bill you need to cover, you won't end up doing your finances any favors.

If the idea of a stock market downturn is enough to keep you up at night, don't let it. Instead, have a plan -- hopefully, one that allows you to coast through a correction unscathed, and maybe even make some money off it in the long run.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
345%
 
S&P 500 Returns
119%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 05/16/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.