How to Prepare Your Brokerage Account for a Stock Market Crash

Young man looking at downward trending data on his laptop

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Stock market downturns can be scary. Here's how to get through one.

If you looked at your brokerage account in late September, you may not have liked what you saw. The second half of the month was very volatile, and we may be in for more rockiness as 2021 moves on. While we don't know whether the stock market will experience a full-fledged crash this year, it's always a good idea to be prepared for one. Here are a few steps you can take to gear up for an extended downturn.

1. Make sure you're diversified

The more diverse your portfolio is, the better equipped you'll be to ride out a stock market crash. If, during a crash, one market sector (say, tech) is hit notably hard, you'll be looking at serious losses on screen if 80% of your assets are tech stocks. A better bet is make sure you own stocks across a wide range of market segments.

ETFs, or exchange-traded funds, can help you better diversify. When you buy an ETF, you're effectively buying a bunch of stocks with a single purchase.

2. Have plenty of cash on hand for emergencies

Here's an important thing to know about stock market crashes -- you don't actually lose money if you don't sell during one. Stock values can drop so that your investments are worth less on screen (or on paper). But if you hang onto those investments and don't liquidate them, you technically won't lose a dime. And one way to put yourself in a great position to leave your portfolio alone is to have plenty of cash available in savings.

You never know when a financial emergency might strike. And if you don't have a decent chunk of cash in the bank, you may be forced to sell off investments to round up the money you need. During a stock market crash, that's the last thing you want to do. So make sure to have a decent emergency fund -- one with enough money to cover at least three months of essential bills.

3. Sock away some extra cash to invest with

Many people shy away from investing when stocks crash. But actually, a market downturn often presents a great buying opportunity.

Imagine you bought a stock for $100 a share that's now worth just $75 a share. That's not great for you. But now, imagine there's a stock you don't yet own that was trading for $100 a share a few weeks ago and is now trading at $75. Suddenly, that decline can work to your advantage.

It's for this reason that it pays to sock some extra money away to invest with. But one thing you absolutely shouldn't do is take money from your emergency fund and use it to buy stocks when they're on sale. Rather, that money should be kept in cash and locked up in the bank for a true emergency.

There's really no way to know when the next stock market crash will happen. Though the market has been volatile recently, things could turn around rapidly. Or not. Do your best not to worry about a stock market crash, even though that's easier said than done. At the same time, focus your energy on making the above moves so you can set yourself up to endure a downturn -- whether it happens soon or way off in the future.

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