How to prepare for a stock market crash
Are you worried about a stock market crash, as rumored before the US presidential elections? In the past 5 decades there have been multiple stock market crashes, so it is inevitable that it will happen for some reason. The good news is that the market has recovered each and every crash only to emerge stronger. So there is no reason to live in fear of another stock market crash.
Your investments can recover if you don't panic when stocks plunge. Here is what you need to do to prepare for a stock market crash
Ensure that you have an emergency fund
You need to build an emergency fund that can help you survive for 3-6 months and you need to keep this emergency out of the stock market by putting it in a savings account, money market or short-term CD. Having an emergency fund will help you stay invested and benefit from long-term returns. Selling off during a market crash will wipe out all your long-term investments and their benefits. If you leave your portfolio alone during this time, you will probably not lose any money at all.
Be ready with cash to invest
You may have some dream stocks in mind that you have been eyeing for quite some time. This would be a prime opportunity to pick up these stocks at a bargain price. This would be a time when other investors are running panicked, but you will be ready to pounce.
Check your portfolio for sector concentrations
Tech stocks led the decline in the market crash of 2000, while in 2008, banks were the biggest losers. During the pandemic, we don't know the nature of the correction. It could be energy, travel and hospitality, or bear markets may be the biggest losers, and tech and Lifesciences and Healthcare may be the biggest gainers. So, it is best to redistribute your portfolio to a more balanced one, rather than concentrating on a few anticipated gainers.
Gold is king
When stocks are not performing, chances are high that investments like gold are outperforming. As gold and other precious metals are not correlated well with equities, they should be part of most diversified portfolios.