A market downturn can be a scary time for investors. The stock market can be volatile, and it’s hard to know what to do with your money when the economy is uncertain.
The most recent stock market crash was on February 24th, 2020, which resulted from the COVID-19 pandemic. Thankfully, the stock market only took less than a month to bounce back. Next time, investors might not be so lucky.
A stock market downturn is almost inevitable. Whether the next one is in a week, a month, or a few years, no one really knows. As an investor, you can either stay put like a sitting duck or brace yourself for the market crash.
If you opt for the latter, good for you, and we’re here to help. In today’s post, we’ll be showing you how you can protect and invest your money during a market downturn.
What Is a Market Downturn?
A market downturn occurs when the stock market consistently falls and investors start to lose money. This happens for several reasons, including a decrease in demand for a particular stock or industry, or an increase in costs that cuts into profits. Market downturns can last for a few days, weeks, months, or even years.
Sometimes the stock market will rebound quickly, and other times it will take longer for it to recover. In general, however, the stock market is very resilient and has always bounced back from even the worst market downturns. So, if you’re patient, you can usually ride out a market downturn and come out ahead in the end.
How to Brace Yourself for a Stock Market Downturn?
If the stock market is looking a tad shaky, it may be time to brace yourself for a downturn. Don’t know how? Well, that’s why we’re here. Here’s how you prepare and protect your money during a stock market downturn.
Stack Up Your Emergency Savings
The first and most important step prior to a downturn is to make sure you have an emergency fund. This will help you cover unexpected expenses during a market downturn (or any other time, for that matter).
Ideally, your emergency fund should be able to cover at least six months of living expenses. If you don’t have that much saved up yet, start small and work your way up. The important thing is to have something saved so you’re not caught totally off guard if the market does take a turn for the worse.
The last thing you want to do during a market crash is sell your assets at a loss. You might have to do so if you can’t cover your basic living expenses. That’s why you should prioritize having an emergency fund before the downturn.
Once you’ve built up your emergency fund, make sure to keep it in a safe place where it won’t be impacted by market volatility. A high-yield savings account or a short-term CD is a good option.
Diversify Your Portfolio
Ever heard of the phrase “don’t put all your eggs in one basket?” If you have, then you don’t need to second guess yourself about diversifying your holdings portfolio.
Diversification is key to weathering any market conditions because it helps reduce your overall risk. When you diversify, you’re essentially spreading your money across different asset classes and investments. That way, if one investment goes down, you’re not as likely to lose all your money.
So, how do you diversify your portfolio? We’re glad you asked; one way to do so is by investing in different asset classes, such as stocks, bonds, and cash. This mix of investments can help cushion the blow if one market takes a hit.
For example, if the stock market crashes but the bond market holds steady, your diversified portfolio won’t lose as much value. It’s much better than investing everything in the stock market.
Another way to diversify your portfolio is by investing in different industries. This can help offset any losses you might experience if one particular industry takes a hit. Try investing in one industry that isn’t too volatile, so you won’t lose as much when the others decline.
Focus Your Investments on Quality Companies
You’ll want to turn your investment focus to quality companies, like blue-chip companies. At least, such companies are well-established and can weather the downturn. Think along the lines of companies like Amazon, American Express, and Apple.
These companies have a proven track record, which is reassuring during market volatility. They’re also less likely to be impacted as much by a market downturn.
As mentioned earlier, you don’t want to put all your eggs in one basket, even if it’s a quality company. To further reduce your risk, consider diversifying your portfolio across different companies and industries. Of course, focus on high-quality companies or at least let them take up most of your portfolio.
Invest for the Long Haul
When it comes to market volatility, the best offense is a good defense. In other words, don’t try to time the market. It’s impossible to predict when a market crash will happen, so you’re better off investing for the long haul.
This doesn’t mean you should invest all your money right away; rather, consider dollar-cost averaging. This is when you invest a fixed sum of money into security or securities at regular intervals. By doing this, you’re buying more shares when the market is down and fewer shares when the market is up.
Over time, you’ll end up paying an average price for all the shares. This technique can help take the emotion out of investing and prevent you from making rash decisions.
Keep a Firm Attitude
No situation is permanent, and this certainly holds for stock market crashes. When the stock market crashes, some people panic and dump all their investments to cut losses. It seems sensible, but it may not work for the best.
A better alternative would be to hold on to your investments and ride out the storm. Remember, some downturns can recover in only a few weeks. Keep the right attitude and things will get back to normal soon enough.
Separate Emotions From Investment Decisions
When the market is going up, it’s easy to get caught up in the hype and start making impulsive decisions. But when the market crashes, things are different; you might be tempted to sell all your investments to avoid further losses, as mentioned earlier.
It can be difficult, but try to separate your emotions from investment decisions. This way, you can make more rational choices. For example, not selling all your investments just because the market has crashed.
Instead, evaluate each investment individually and only sell if it’s not a good fit for your portfolio anymore. Also, spend your time with other investors and see how they’re handling the crash. Whatever you do, don’t let market volatility dictate your investment decisions; that’s a recipe for disaster.
Invest Regularly (In Bits)
Become a regular investor in the stock market but don’t go all in. You’re much better off drip-feeding your money into the stock market. Doing so helps minimize losses should things go haywire.
What’s more, investing in bits lets you spread your investment over multiple companies. This not only diversifies your portfolio but also helps you average out the cost of each share.
For instance, if shares are trading at $100 today and $120 tomorrow, buying all the shares today would cost you $1000. If you bought $20 worth of shares every day for 50 days, you’d end up paying an average of $110 per share.
Move to Cash or Cash Equivalents
Some professional traders find it wise to move to cash or other equivalents. If you get out quickly enough, you can sidestep the crash. You can then get back in the game when prices are a lot lower.
However, you’ll have to keep a keen eye on the market because no one can predict a downturn. But if you’re lucky enough to fly out before it happens, good for you. When you get out before the crash and buy when prices are lower, you’ll make a serious killing when the market starts to appreciate again.
Keep Some of Your Money in Guaranteed Investments
While it’s true that guaranteed investments don’t pay enough, they’re a much better option than losing everything in the stock market. The best part is there are tons of guaranteed investments for you to opt for.
Short-term investors can consider things like treasury securities and bank certificates of deposit. Long-term investors, on the other hand, can look into stuff like indexed annuities or indexed universal life insurance options. Heck, you can even invest in gold and reap a fortune later on.
Pick a guaranteed investment that seems most promising to you.
Pay Off Debts and Stay Liquid
You should always pay off debts, especially high-interest ones. Crash or no crash, this is a financial principle you should live by.
Paying off debts not only saves you money in interest payments but also gives you some breathing room during tough times. After all, the last thing you want is to default on a loan because you can’t afford the payments.
You should also keep some cash on hand so that you can take advantage of market opportunities when they come up. This way, you won’t have to sell investments at a loss just to get your hands on some cash.
Signs That the Stock Market Is About to Crash
Now that you know how to brace yourself for a downturn, let’s now look at signs that the stock market is about to take a nosedive. Some signs of a stock market crash include.
Inflation is when the prices of goods and services rise. This happens when the economy is doing well. The problem with inflation is that it devalues cash, which can lead to a market crash.
When inflation is high, people tend to invest in assets like stocks and real estate. This drives up asset prices, which eventually leads to a market bubble. When the bubble bursts, it causes a market crash.
To spot inflation, look out for things like rising prices, wages, and interest rates. If you see these things happening, it’s a good idea to start moving your money into assets like stocks and real estate.
Inverted Yield Curve
An inverted yield curve is when short-term interest rates are higher than long-term interest rates. This happens when the market is about to crash.
The reason for this is that when the market is about to crash, investors start dumping stocks and moving into bonds. This drives up bond prices and drives down stock prices.
To spot an inverted yield curve, all you have to do is look at the interest rates on bonds. If you see that the interest rates on short-term bonds are higher than the interest rates on long-term bonds, it’s a sign that the market is about to crash.
House Sales Are Going Down
The housing market is a good indicator of the stock market’s condition. When the housing market is doing well, it usually means that the stock market is also doing well.
However, when the housing market starts to slow down, it’s usually a sign that the stock market is about to crash. That’s because people are unlikely to buy homes when the economy is shaky. This drives down house prices and so does the stock market decline.
Decline in Vehicle Sales
Vehicle sales are another good indicator of the stock market’s condition. When people are buying lots of cars, it means that the economy is doing well. However, when car sales start to decline sharply, it’s usually a sign that the stock market is about to crash.
Failing to Prepare Is Preparing to Fail
The market may be down today, but that doesn’t mean it will stay that way forever. By following the tips above, you can protect your money and even grow it during a market downturn. Just remember to stay calm and not make any rash decisions; things will eventually recover.
Also, remember that market downturns are temporary. Hopefully, the next downturn won’t be too prolonged. If you hold on there, you can weather the storm and get back to your usual ways.
Don’t forget to check out the other posts on the site for more informative reads.