3 Easy Ways to Prepare for a Market Crash | Smart Change: Personal Finance

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(Katee Brockman)

The stock market is often unpredictable, which can be unnerving — especially when you have your life savings tied up in your investments. Stock prices have been particularly volatile over the last couple of months. The market dipped early in the year before quickly rebounding, only to fall once again in recent weeks.

While nobody knows what the market will do next or whether we’re headed for a crash, it doesn’t mean you can’t prepare. By taking these three steps right now, you’ll be ready no matter what happens.

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1. Double-check that you’re diversified

A well-diversified portfolio is key to surviving stock market volatility. If you put all your eggs in one basket, so to speak, you risk losing a lot of money if the market crashes. But if your money is spread across a wide variety of stocks from multiple industries, there’s a much better chance your portfolio will pull through.

There’s no hard rule as to how many investments you should own, but it’s wise to aim for at least 25 to 30 different stocks from a variety of sectors. If you’re investing in mutual funds or exchange-traded funds (ETFs), you may already be covered, as each fund may contain hundreds of stocks.

If you’re a risk-averse investor, more diversification can help limit that risk. While it is possible to overdiversify, in general, the more variety in your portfolio, the safer your investments will be.

2. Solidify your emergency fund

If you don’t already have at least six months’ worth of savings stashed in an emergency fund, now’s the time to focus on building a healthy safety net. Market downturns can be terrible times to withdraw your investments. Stock prices are lower, so if you sell your stocks, you could end up selling for less than you paid for them — thus locking in your losses.

If you face an unexpected expense when the market is in a slump, an emergency fund can make it easier to avoid tapping your investments.

3. Don’t panic

Market downturns are daunting, even for experienced investors, but they’re normal — and temporary. The market has experienced dozens of corrections and crashes over the years and has recovered from every single one of them. Chances are good that if the market crashes again, it will rebound eventually.

The best thing you can do, then, is to stay calm and ride out the storm. By keeping your money invested, you’ll reap the rewards when stock prices inevitably bounce back. And when you keep a long-term outlook, it will be a little easier to avoid getting caught up in the market’s day-to-day movements.

Nobody knows whether the market will crash or not, but it’s wise to start preparing, just in case. When you have a strategy in place, you can rest easier knowing your investments are as safe as possible.

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