Suze Orman Says You Won't Lose Everything in a Stock Market Crash if You Do This

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  • Many people are worried about the idea of a major stock market downturn.
  • You can mitigate that fear by maintaining a diverse mix of assets.
  • While you can diversify by purchasing stocks from different market segments, you may want to look at broad market ETFs.

Now that's reassuring.

It's fair to say that 2022 was a tough year for stock market investors. And at this point, a lot of people are still seeing losses in their brokerage accounts.

Meanwhile, we're starting off 2023 with a fair share of lingering volatility. And there's reason to believe things could get even more rocky.

The Fed isn't done battling high inflation. That could drive up consumer borrowing costs to the point where spending starts to decline in a serious way, thereby leading to an economic recession. And so if you're worried about a near-term stock market crash, you may be in good company.

The good news, though, is that there's a simple step you can take to reduce the chances of losing a lot of money in a stock market crash. And if you're not convinced, you should know that that person behind this advice is none other than financial guru Suze Orman.

Diversification is key

In a recent podcast episode, Orman addressed concerns about a stock market crash and told listeners that one of the most important things to do as an investor is make sure your holdings are diversified across the board. When you spread out your assets across a range of market sectors, you're less likely to lose money than if you were to focus on one segment only.

Just take a look at how badly the tech sector got battered in 2022. It's not surprising that so many tech companies have been implementing layoffs this year.

If you were heavily invested in tech, then your portfolio probably took a major hit last year. But if tech was only one of nine segments you had money in, the damage may not have been as extensive.

How to diversify your portfolio

If you want to build a more diversified portfolio, simply make sure you own assets across a range of market segments. But if that seems like too much work, there could be a simpler way to go about it -- load up on broad market ETFs (exchange-traded funds).

ETFs are funds that trade publicly, and there are different types you can buy. You could, for example, buy sector-specific ETFs, like energy or healthcare ETFs. But that may not help you diversify your portfolio as much as you want to.

That's why broad market ETFs could be a better bet. If you buy S&P 500 ETFs, you'll effectively be investing in the 500 largest publicly traded companies. That means you'll be gaining exposure to a range of market segments -- but without having to do a ton of research.

To be clear, when the stock market or S&P 500 index tanks, which happened in 2022, your portfolio balance is apt to follow suit if you invest heavily in S&P 500 ETFs. But in that case, you won't be an outlier. You'll simply have to wait for the market to recover like everyone else. The upside, though, is that you may not end up with excessive losses in your portfolio compared to the average investor.

The idea of losing money in a stock market crash is scary. But if you make an effort to maintain a diverse portfolio, you can minimize that risk to some degree.

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