10 Smart Moves to Make if the Stock Market Crashes in 2021

The stock market will crash again. The big question is when it will happen, not whether it does. For investors who are prepared for them, market crashes provide opportunities to build wealth not available in ordinary times. Indeed a big part of Warren Buffett’s strategy is to build cash reserves during good times in order to deploy that cash during a crisis.

If you’re looking to put yourself in the position to take advantage of the market’s next panic, then now is the time to prepare yourself for it. With a good plan in place in advance, you will be able to make these 10 smart moves if the market crashes in 2021 -- and will likely find yourself in a better spot once things recover.

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A key reason people panic in a market crash is that they’re scared of seeing the money they need evaporate before their very eyes. If the money you have invested isn’t needed to cover your near-term costs, it’s a lot easier to keep your wits about you during a crash. That gives you a better shot of staying invested to be able to take part when the next recovery unfolds.

As a good rule of thumb, money you need to spend within the next five years does not belong in stocks. Instead, keep your near-term money in cash, CDs, or duration-matched investment-grade or Treasury bonds. You won’t earn much return on those investments, but during a crash, you’ll have a much higher likelihood of having that money still being there when you need it. You’ll also find it a lot easier to make smarter moves with the rest of your money when your nearer-term needs are covered.

ALSO READ: 4 Reasons the Stock Market Could Crash in January

No matter how careful you think you are with margin, if you’re using it when the market crashes and your broker panics, you can find yourself forced to liquidate your holdings. Often, such forced selling happens near the bottom of the market. If you find yourself in that situation, it means not only do you participate in the downside, but you also are at risk of missing out on the upside by not being invested when it happens.

By avoiding margin, you can keep yourself in complete control of your investments and not be forced to sell, no matter how large the market’s crash winds up being. Often, the market’s biggest gains happen right after its biggest losses, which makes it critically important not to get forced out of your investments by a downswing.

Those first two moves are designed to keep you from feeling or getting forced to sell just because the market is down. So it should go without saying that this third move is a reminder to not to waste all that hard work by voluntarily selling just because the market is down.

Certainly, if there’s a good reason to sell a company whose shares you own, go ahead and do so. If the company was worth owning at $60 a share and it’s now trading at $20 a share and that’s the only thing that changed, it’s probably worth buying more instead of selling. The key is to have a good sense for the company’s long-term prospects and whether it will survive the short-term turmoil to make it to that presumably brighter future.

During a market crash, you may want to take your dividends as cash instead of automatically reinvesting them in the companies that paid them. There are a couple of key reasons for this. First, the psychological benefit of seeing the cash flow in can help keep you composed while those around you are panicking. Second, that cash gives you money to invest in the opportunities the market is creating by offering companies at a substantially lower price.

In addition, there’s often a good reason for a market crash. Taking your dividends as cash gives you the opportunity to assess whether the company is still worth investing in before putting that money back into it. You might find it’s still worth your while to invest in it, but getting the opportunity to look before you do also gives you the chance to make an intelligent decision instead of acting automatically.

ALSO READ: 3 Stocks to Buy Ahead of the Next Market Crash

While there’s often a good reason for a market crash, as investors panic, they often wind up discarding strong businesses along with the weaker ones. The depths of a market crash can be a great chance to buy a strong company at a bargain price.

If you’re looking to seek out these bargains, remember that a share of stock is nothing more than a small ownership stake in a business. It gets its true value based on the company’s future prospects, but its market price is based on what other investors are willing to buy and sell it at. When a company’s true value is higher than its market price, it might just be the baby thrown out with the bathwater that’s worth considering for your investing dollars.

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We hear it over and over from investors, “I wish I had bought Amazon or Netflix when they were first recommended by the Motley Fool. I’d be sitting on a gold mine!” And it’s true. And while Amazon and Netflix have had a good run, we think these 5 other stocks are screaming buys. And you can buy them now for less than $49 a share! Simply click here to learn how to get your copy of “5 Growth Stocks Under $49” for FREE for a limited time only.

Although market crashes can be a great time to pick up strong businesses at bargain prices, value-seeking investors often have the tendency to jump in early, before the market reaches bottom. This is known as the value investor’s curse, and it often ensnares eager investors excited to be able to find what look like clear bargains. If you’re looking for values, you may not be able to avoid that curse, but you should be able to manage it.

One approach value investors take is to buy in thirds. Say you’re looking to invest $1,500 in a company. Buy your first $500 once you see it available at what looks like a reasonable price. If it continues to drop, invest the second third. If it drops even further, the final third. That way, you get in the investment without fully committing and still have money to take advantage of those lower prices if they come to pass.

If, on the other hand, you did manage to find the bottom with that first investment, you can rest assured that you at least got part of your investment at a bargain price. Since you still have the cash you were going to allocate to the other two-thirds, you can decide whether you’re willing to invest it in the company at a higher price or would prefer looking for an alternative pick.

If you’ve got money in a traditional-style retirement plan, a market crash can be a perfect time to convert some of the value of that account into a Roth IRA. This is because the taxes on a conversion are based on the dollar amount being converted, not the number of shares. Converting during a market crash can thus get a higher portion of your investments into a Roth IRA for the same tax cost. Once in the Roth IRA, it can grow tax free for your retirement.

A key reason to consider making this move is that money in traditional-style retirement plans is subject to required minimum distributions in retirement. Those distributions are based on the account’s balance, not your actual spending needs. If your affected accounts’ balances are high enough, those distributions will raise your Medicare costs and the taxes on your Social Security benefits.

By moving the money to your Roth IRA, you pay taxes on the conversion but may be able to avoid some of those higher costs later. This is because your own Roth IRA never has to be withdrawn in your lifetime, and if you do make a qualified withdrawal from it in retirement, it won’t count as income.

ALSO READ: 2 Stocks I Can't Wait to Buy When the Market Crashes Again

Although panic selling is a terrible idea, if you find yourself with positions that are legitimately worthy of selling, a market crash can be a great time to take advantage of tax-loss harvesting. In essence, any capital losses you take in the year can offset an equal amount of capital gains you take in the year. In addition, if your losses exceed your gains, up to $3,000 of your capital losses can generally offset ordinary income, with the remainder carrying over to the next year.

The key to remember is that you should only sell positions for a loss that you legitimately want to stop owning. If you buy your shares back within 30 days, you wind up with a "wash sale," which disallows your loss for tax purposes. Since the market can move a lot within a month, don’t take your losses with an intent to buy the same company back later, as the delay may cost you more than the tax benefits you get from it.

If you have a 401(k), 403(b), TSP, or other similar employer-sponsored retirement plan available to you, a market crash can be a great time to increase your contribution levels. Similarly, as long as you or your spouse have earned income, a market crash can be a great time to increase your contributions to your IRA. This is because you are limited in the amount you can contribute to these types of accounts each year, and the same amount of money can buy more shares during a market crash.

In 2021, people under age 50 can typically contribute up to $19,500 to their employer-sponsored retirement plans, while those age 50 and up can typically contribute up to $26,000. Similarly, those under 50 can contribute up to $6,000 to their IRAs for 2021, while those age 50 and up can contribute up to $7,000. If you haven’t maxed out your IRA for 2020, there’s still time. You have until April 15, 2021, to make a contribution for tax year 2020. The IRA contribution limits are the same for 2020 as for 2021.

Although investing more money during a market crash may ultimately wind up being the best thing you can do for your future net worth, it can be incredibly difficult to do. Putting more money into falling stocks often feels like throwing good money after bad, and it’s easy to get concerned that the falling stocks you’re investing in may ultimately wind up going to $0.

One key way to minimize that fear is to increase the amount you’re automatically investing in a broad-based index fund every payday. As an index fund owns multiple stocks, the complete failure of any one of them won’t destroy your entire nest egg, making it easier to combat those fears. In addition, since index funds tend to beat the vast majority of professionally managed funds over time, this can be a great way to invest for the long haul even after the crash is over.

5 Winning Stocks Under $49
We hear it over and over from investors, “I wish I had bought Amazon or Netflix when they were first recommended by the Motley Fool. I’d be sitting on a gold mine!” And it’s true. And while Amazon and Netflix have had a good run, we think these 5 other stocks are screaming buys. And you can buy them now for less than $49 a share! Simply click here to learn how to get your copy of “5 Growth Stocks Under $49” for FREE for a limited time only.

A market crash can be incredibly scary time for you and your money. If you’ve got a good portfolio structure and plan in place in advance of the next crash, you’ll give yourself a much better shot of winding up in a good spot at the end of it. The time to put your plan in place is now, before that crash happens, so that whether the next crash happens in 2021 or beyond, you’ll be ready when it comes. So get started now, and be prepared for the next time a bear market comes roaring your way.

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