Ways to Prepare for a Stock Market Crash

It’s been nearly a century since the infamous 1929 stock market crash that opened the door for the Great Depression. And while the world has not seen a crash at that scale since, there have been many periods in which stocks have rapidly tanked.

So how do you know whether the stock market is https://www.maritimjatim.info/ crashing, or whether it’s just a bad day? Here are some things to consider, and what to do if you’re concerned.

Is the stock market crashing?

Although history can tell us how long crashes, stock market corrections and bear markets typically last, no one gets a calendar notice announcing the time, nature and projected magnitude of future dips. Stock market crashes are only clearly identifiable in hindsight.

What is a stock market crash?

While there’s no specific number that indicates a crash, here’s a bit of context. The S&P 500 stock index typically changes between -1% and 1% on any given day. Anything outside these parameters could be considered an active day on the stock market — for better or for worse.

If the S&P 500 drops 7% in a single day, trading may be halted for 15 minutes. This has only happened a handful of times in the market’s history, and indeed marks a very bad day on Wall Street. A crash is marked by a sharp and sudden drop in stock prices, usually following an uptrend in the stock market, also known as a bull market.

What to do during a stock market crash

If you have a long investment timeline and are properly diversified, it’s often best to ride out the downturns. And understanding that a crash could happen means you can plan for it and react thoughtfully. Here’s a six-step game plan for what to do when the market crashes.

1. Know what you own — and why

A fear-driven reaction to a temporary slump isn’t a good reason to dump an investment. But if you look back at your original stock research notes, you may find some good reasons to sell.

Thorough stock research includes a written record of the strengths, weaknesses and purpose of every investment in your portfolio, as well as things that would earn each investment a place in the «out» box. Your research is like an investing road map, a tangible reminder of the things that make a stock worth holding.

During a market downturn, this document can prevent you from tossing a perfectly good long-term investment from your portfolio just because it had a bad day. On the flip side, it also provides clear-headed reasons to part ways with a stock.

Ideally, before diving into stocks, you gauged your risk tolerance, or how much volatility you’re willing to stomach in exchange for higher potential returns. Investing in the stock market is inherently risky, but what makes for winning long-term returns is the ability to ride out the unpleasantness and remain invested for the eventual recovery, which, historically speaking, is always on the horizon.

2. Trust in diversification

When a market decline hits, your results may vary — and perhaps for the better — if you’ve invested money across different baskets of asset classes like stocks and bonds. Diversifying, or distributing your money across investments, is key to reducing investment risk and smoothing the ride through a tumultuous market. Diversifying helps ensure your investments (eggs) aren’t concentrated in one type of asset (basket). So if one stock or industry has a bad day, your other investments may help offset those losses.

3. Consider buying the dip

Market dips can also be a buying opportunity. Think of it as buying stocks on sale when the market crashes. The trick is to be ready for the fall and willing to commit some cash to snap up investments whose prices are dropping.

Here’s how to tell if you might be ready to buy the dip: You already have an emergency fund, you’ve allocated money for retirement and you have cash available for everyday expenses. You’ve set aside some cash so you’re ready for a flash sale when disaster strikes, and you keep a running wishlist of individual stocks you would like to own.

4. Think about getting a second opinion

Being an investor is rewarding when the stock market’s on a tear and your portfolio is going up in value. But when times get tough, self-doubt and ill-advised tactics can take root. Even the most confident saver-investor can fall victim to harmful short-term thinking. Don’t let self-doubt sabotage your financial plans.

Consider hiring a financial advisor to kick the tires on your portfolio and provide an independent perspective on your financial plan. In fact, it’s not uncommon for financial planners to have their own financial planner on their personal payroll for the same reason. An added bonus is knowing there’s someone to call to talk you through the tough times

5. Focus on the long term

When the stock market declines, it can be difficult to watch your portfolio’s value shrink and do nothing about it. It’s normal to feel pessimistic after a crash, but if you’re investing for the long term, doing nothing is often the best course.

It’s important to remember that when you sell investments in a downturn, you lock in your losses. Take the February 2020 COVID-related market crash. Say, you’d had $1,000 invested in an exchange-traded fund, or ETF, that tracked the S&P 500. Such a fund would have lost more than 30% of its value during that crash. If you had sold, you would have locked in that loss, but if you held onto it, you would have recovered your losses by that August.

If you plan to reenter the market at a sunnier time, you’ll almost certainly pay more for the privilege and sacrifice part (if not all) of the gains from the rebound.