There are plenty of reasons to think that the stock market could crash in the near term. For one thing, stocks are heavily overvalued across the board, and so the market is bound to correct for that at some point. Also, let’s not forget that while coronavirus vaccines are giving us reasons to be hopeful, we’re still in the middle of a pandemic and COVID-19 cases are rising in some parts of the country. Plus, the economy on a whole hasn’t yet recovered and the jobless rate has a ways to go before dropping back to pre-pandemic levels.
Still, worrying about a stock market crash just isn’t a good use of your mental energy or your time. Instead, consider making these specific moves that should give you peace of mind.
1. Boost your emergency savings
The only way to lose money in a stock market crash is to sell off investments when they’re down. And if you have plenty of money in the bank to cover unplanned expenses, you shouldn’t need to do that.
As a general rule, it’s a good idea to have three to six months’ worth of living expenses available in savings. That way, if your car breaks down or you lose your job, you’ll have cash reserves to fall back on. You also won’t have to tap your investments and liquidate positions at a time when stocks are down to generate income for yourself.
2. Diversify your holdings
A diverse portfolio will generally be better equipped to withstand a stock market crash than a portfolio that’s not diversified. Take a look at your holdings and make sure you’re not too heavily invested in any one company or segment of the market. And if you feel you could use a better mix, buy some new stocks or load up on exchange-traded funds, which let you invest in a bucket of stocks with a single purchase.
3. Make sure you’re invested appropriately for your age
The right asset allocation could make it so that a stock market crash doesn’t actually hurt you. Say you’re in your 30s and are invested heavily in stocks, and during a crash, your portfolio loses 20% of its value. Clearly, that’s a hard thing to look at. But if you’re not actually planning to cash out any of those investments for another 30 years, then there’s really not much to worry about. The stock market has a long history of recovering from downturns, so if you sit tight, you likely won’t lose a dime.
On the other hand, if you’re in your 60s, you shouldn’t be heavily invested in stocks if you expect to tap your portfolio to help cover your expenses during retirement. And if you’re already retired, you should have even less exposure to stocks and shift toward bonds, which are typically a lot less volatile. The key, either way, is to make sure your portfolio is appropriate for your age, because if it is, a stock market crash shouldn’t worry or hurt you.
Stock market crashes are fairly common, but they can be unsettling nonetheless. Rather than torture yourself worrying about one, take steps to make sure that you’re adequately prepared for the next downturn that strikes.