The Next Stock Market Crash Is Coming And Here’s How To Avoid It
The coronavirus pandemic broke out and spread exponentially by March 2020, creating an economic fallout that brought the markets to their knees by mid-year. Many saw the viral threat as the last straw that would kick off a market crash. However, the stock market bounced back quickly towards the end of 2020, with some stocks surging even higher than they traded before COVID-19.
The rapid bullish recovery meant that the coronavirus had created a false crash, and that a bigger crash could still be on the horizon. With the ongoing pandemic and stock prices still high, there are concerns that the market will still experience a major crash. Numerous analysts are convinced about it, especially with the viral cases escalating as stocks reach historic highs.
Preparing for the worst
Predicting a market crash is not exactly a science, and nobody knows when it will happen. The bull run cannot continue forever, and whether it happens in a week, a month, or years from now, you can count on the fact that, like Thanos, it is inevitable. Investors should take the necessary steps to be ready when it does happen. Here are some measures that you can take to prepare for the upcoming stock market crash.
Analyze your investments and determine how much downside you are willing to handle
The thing about a market crash is that it is unpredictable. You might wake up tomorrow and find that it has already happened, which means that a significant amount of gains will have already been eroded by the time you find out. Investments are all about risks and rewards; thus you should already know much risk you are willing to take and subsequently how much drawdown you can handle in the event of a huge crash.
Sometimes it is best to exit with some losses than to lose all your gains and potentially some of your initial investment. Note that pulling out from the market at the wrong time might also compromise long-term performance.
Be ready to ride the recovery wave
History is the best teacher, and it clearly shows that the market bounces back higher after every crash. Exiting the market at a safe level during a market downturn might save you some gains but remember that what goes down must also go up. There is always recovery after every crash, and if you follow Warren Buffett’s teachings, being greedy when others are fearful might make you richer than you can ever imagine. Invest in the market when the chips are down and wait for the recovery wave, and you will enjoy the best gains possible. You would have to keep about identifying the bottom out part.
It helps to be psychologically prepared for such conditions rather than panicking. Understand that losses are part of the game and that there are more opportunities to be had ahead. Such an attitude towards the market will keep you focused even when things are not going well.
Do not invest your emergency funds
Investing in the stock market also means embracing the inevitable, and it is why you should never invest all your money. Always have some cash saved up to cover your lifestyle and financial needs while investing the non-essential funds. This will provide a cushioning in the event of a market crash. Traders have to embrace the reality of investing, which means covering all bases.
Ensure preparedness by regularly setting aside emergency savings and clearing your short-term debt obligations. The emergency fund should help you weather the hard economic times that will occur after a massive downturn. Never invest money that you will need within the next half-decade or so. Regularly withdraw some of your gains from the stock market to avoid too much exposure.
Spread out your risk
Not putting your eggs in one basket is a great way of building up a buffer that will protect you from a hard fall when the market goes belly-up. Study the market to determine which segments or investment opportunities perform well during a stock market crash and put some of your money there. For example, gold performs well when currencies and stocks have it rough, which is why savvy investors use it as a safe haven.
Determine which stocks to purchase during the selloff
A stock market crash is characterized by a huge selloff. Being a savvy investor not only involves knowing which stocks to let go but also which ones to purchase in the event of a massive selloff. A wise investor would thus prepare by determining which stocks would be ideal to purchase during the downturn and which ones to avoid. This requires having a good understanding of demand and supply chains, as well as market performance data which will help you sift out the good stocks from the bad ones.
Clearly define your strategy and stick to it
A solid strategy is one of the best ways to cope with market uncertainties. Consider developing a strategy as you contemplate other aspects such as risk appetite and amount of money to invest. This will help you stay on track even at the worst times in the market while maintaining your cool. Following your strategy will keep you grounded while helping to avoid emotional trading. It is difficult to remain calm when things are falling apart but always keep in mind that following a written strategy when sober is probably the best way to survive the tough times.
Market downturns are unpredictable and cannot be escaped. However, market opportunities are also a real thing, and there is growth to be enjoyed. Keep in mind that a market crash also means that there will also be opportunities to tap into. These cyclical market characteristics are what the best traders use to survive.