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How to Prepare for a Market Crash

Oct - 31 - 2017
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We’re at a point in time where it seems like almost every day the stock market is closing at record highs, but inevitably there will have to be a decline of some kind. It may not be a catastrophic crash, but there could be some storms on the horizon.

So, when you’re an investor, how do you prepare for a market crash? How do you ready yourself to be able to deal with any headwinds that come your way?

Trading experts always point out the importance of accepting and respecting risk if you want to make money, but this can be easier said than done. The following are some of the things you can do to prepare for a potential market downturn effectively.

Always Be Diversified

The best thing you can do as an investor in any sense is to make sure your portfolio is as diverse as possible. Whether the market is up or down this can be your best bet.

Of course, you’ll want to make sure you’re not just diversifying based on things like the types of securities you own, but also look at things like geography. Something people tend to overlook is the fact that when one type of security or location looks like it’s going straight to the bottom, another may be going up.

Timing can also be important in your diversification strategy. You might play around with riskier short-term strategy, but also pad your portfolio with those securities that you can hold onto for the long-term.

Cushion Yourself So You Don’t Have to Sell At Lows

During the recession and market crash in 2008 so many people panicked and took everything out when prices were at all-time lows. That was such a huge mistake, and by the time they got back in, they’d missed some of the best deals.

You need to make sure that no matter how you invest in the stock market, you give yourself protection and you can survive if there is a crash, without taking your money out when it’s low. You don’t want to be forced to sell, so set up your investments so that you can live comfortably even in the event of a crash.

Your strategy needs to always include consideration of your liquidity needs.

Money Markets

Finally, if you’re a younger investor, you might need to plan much for a crash at all. You have a long-term investment horizon, and you can just stay the course if you’re able to stomach it.

For older investors, you might not have this luxury. If you’re close to retirement and a crash happens it can be terrifying, to put it mildly.

As an older investor, you should consider putting around three years of living expenses into a money market account. This ties in a bit with the tip above, about avoiding the urge to sell at low prices. If you have that money in a money market, you are likely to be able to weather the crash without having to sell equities when prices are rock bottom.

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