After 18 months of staggering growth, the stock market has had a rocky week. The S&P 500 recently experienced its worst single-day performance since May, and it appeared that the market may finally be headed toward correction territory.
While the stock market has since recovered from its fall, some investors are worried a full-blown market crash is still on the horizon.
To be clear, nobody knows whether a market crash is coming or not. While it is true that the pandemic continues to rage on, the unemployment rate is still high, and the economy remains unstable, all of those factors haven’t stopped the market from growing over the past year and a half.
That said, it’s never a bad idea to be prepared for a market crash. Here’s what I’m doing to get my investments ready, regardless of whether a crash is looming or not.
1. I’m holding my investments
It can be tempting to sell off your stocks when the market gets shaky. In theory, it may make sense to sell just before prices fall so that your portfolio won’t take a beating when the market crashes.
However, timing the market is next to impossible for even the most skilled investors. Even if conditions look ideal for a crash or correction, that doesn’t mean it will actually happen. The market has fooled investors before (think back to when the market defied the odds by immediately rebounding after its crash in 2020, for example). If you sell now, there’s a chance stock prices could continue climbing.
For that reason, I’m not selling anything regardless of what the market does. I’ve carefully chosen investments that I believe will perform well over the long term, and I’m confident they will be able to survive a downturn.
2. I’m double-checking that my emergency fund is strong
Market downturns can be one of the worst times to sell your investments, so it’s important to make sure your financial situation is relatively healthy before stock prices fall.
When the market crashes, stock prices are at their lowest. If all your money is tied up in your investments and you face an unexpected expense, you may have no choice but to sell your stocks. By selling during a downturn, though, you’re likely selling your investments for less than you paid for them, locking in your losses.
Right now, I’m double-checking that I have at least six months’ worth of savings stashed in my emergency fund. This way, if the market crashes and I incur an unexpected cost, I can rest easy knowing I can leave my investments alone.
3. I’m making a list of potential investments to buy
Though market downturns are a less-than-ideal time to sell your investments, they’re a perfect opportunity to buy.
Because stock prices are lower during downturns, you can buy quality investments for a fraction of the price. Although their prices may be lower, good investments are still good investments — no matter what the market is doing at the time. Strong companies are likely to pull through market downturns, and by investing when prices are lower, you’ll reap the rewards once the market rebounds.
The key to investing during a downturn is to make a list of stocks you’re interested in before prices fall. Market downturns can be like Black Friday sales for investors eager to snag deals. If you go into a downturn with no idea which stocks you want to buy, you may end up buying a less-than-ideal company simply because it was on sale. By doing your research beforehand, though, you can ensure you’re buying the best stocks at the best prices.
Market crashes can be alarming, and it’s normal to feel nervous if a downturn is on the horizon. Nobody knows for certain whether a crash will actually happen, but if it does, you can rest easier by making sure you’re as prepared as possible.