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A stock market crash is coming someday. Although we never know exactly when it will come, it’s best to start preparing so it doesn’t sneak up on us. But how exactly do you prepare for a market crash when you don’t know when it will come?
The steps you should take to prepare yourself for a crash vary wildly depending on your individual situation. Because of that, we are only going to give general guidelines for three basic scenarios. Obviously, everyone’s individual situation is different, so there are people who don’t fit into any of these categories. If that’s you, check out the category that’s the best fit, and head out to a personalized financial advisor if you need more specific advice.
The general categories are:
1. Lots of time to invest with a secure job
2. Lots of time to invest with a not-so secure job
3. Not so much time to invest/retired
What is a Market Crash?
Before we dive too deeply into how to prepare for a market crash, let’s explore what it means. According to Wikipedia, a stock market crash is a sudden, intense drop in stock prices across a large portion of the stock market. These crashes can have huge ramifications throughout the economy, leading to recessions and even depressions.
Famous Stock Market Crashes
- Black Monday and Black Tuesday – Sep, 1929 – The Dow Jones Industrial Average (DJIA) fell 23%, leading to the Great Depression
- Black Monday – Oct 1987 – DJIA fell 22%, but the market rallied soon afterward
- Dot-Com Bubble, March, 2000, mostly tech stocks were affected
- Crash of 2008 – Sep 2008-Mar 2009, DJIA fell 54%, leading to the Great Recession
As you can see, not all market crashes lead to recessions. Regardless, they can be dangerous for investors and workers alike. This is why it’s so important to be prepared for one before it happens.
How to Prepare for a Market Crash
Lots of Time to Invest with a Secure Job
If you have a lot of time to invest and you have a secure job, don’t panic. You are in a great position to handle a market crash. If you know your job is secure even in the harshest of economies, you have a lot less to worry about if the stock market crashes. You also have a lot of time to recoup any investment losses.
My best advice for you folks is to ensure that any individual stock holdings you have are solid enough to survive a downturn. If they aren’t, you may want to consider reallocating some into index funds or exchange-traded funds (ETF). In addition, you should be putting some cash reserves aside so that you are ready for the big fire sale on stocks!
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To be clear, you still want to make sure that your financial house is in order. You should be establishing an emergency fund and investing in a retirement account. But these are investment strategies that you should be doing whether a crash is coming or not.
Lots of Time to Invest with a Not-So Secure Job
Unfortunately, a market crash and recession could lead to job losses in a variety of industries. If you work in an industry that is at risk for job losses and lay-offs during an economic collapse, you need to be preparing now for a stock market crash.
There are a few things you can start doing now to make sure you will be okay if your industry suffers in the next recession.
Preparing for a Market Crash without Job Security
The first thing you should do to prepare for a market crash if your job isn’t secure is to make yourself indispensable at work. Improve your hard skills with Codecademy or Udemy, and master soft skills with Linked In Learning. Taking these courses will not only enhance your skills, but it will give you something new to add to your resume. Also, check out my post on adult online education for the best options for online learning.
Speaking of resumes, the next step is to update yours. Add those courses you took. Make sure that your resume reflects your current title and responsibilities. If you need help writing and updating one, head over to Fiverr to find a freelance who specializes in resumes. Having an up-to-date one will ensure that if you do lose your job, you will be able to find a new one quickly.
While you’re working on enhancing your skills and updating your resume, you should also be working on building your emergency fund. If you are at high risk for a layoff, you should try to fund your emergency fund with six months of living expenses. Not only will this get you through a job loss, but it will also help keep you afloat if the first job you find pays less (which happens a lot in recessions!).
A final thing you can do is create additional income streams. A side hustle is a great way to turn a hobby into extra income. That extra income will come in handy if you lose your main job. If you want to start a side hustle but aren’t sure where to begin, check out this amazing course, Launch Your Side Hustle. It’s the absolute best resource for anyone looking to build a legitimate side business.
Doing these four things now will help you prepare for a market crash before it comes. You will be in a better position to weather any storm, even if it includes losing your primary source of income.
Investing Without A Secure Job
If you’re investing for the long run, you shouldn’t worry much about stock market prices, even during a downturn. While you are able, you should continue contributing to your retirement accounts as you normally would. And if you can, you should still try to contribute during a market downturn – that’s when you will get the best deals on stocks!
However, I would caution against owning individual stocks, unless you are a skilled investor. There’s so much volatility on Wall Street, one day a company might be doing well, and the next day they are filing for bankruptcy. You could lose all of your money in a giant sell-off. You just never know what will happen.
If your job isn’t secure, it’s even more important that your portfolio be diversified in case of a stock market crash. This will ensure that you won’t lose big on individual investments, should companies you were invested in go out of business.
Preparing for a Market Crash Without a Long Time Horizon
Your preparations are going to look a lot different if you don’t have a lot of time to recoup any investment losses. If you are at or near retirement, you may want to look at transitioning some riskier holdings like stocks into safer investments, such as bonds or cash reserves. This is especially important for money that you may need in the next five to ten years, because it may take that long for the market to recover from a crash.
The downside to reallocating is that if you do it too soon, you could miss out on some gains. The market is still experiencing record highs, and we don’t know where the peak will be. This isn’t an easy decision. It’s impossible to time the market. It’s also impossible to pull your money into the safety of bonds and CDS right before the market crashes.
If I were just a few years from retirement, I’d definitely start safeguarding about fifty percent of my nest egg against a crash. I’d want to make sure that I had enough safety money to survive until the market recovers. I’d keep the rest invested though (in index funds!), to reap the benefits of the current economy and to reap the benefits of buying on sale during a downturn.
The Risk of Cash Reserves
Of course, as with everything, there is risk involved. Interest rates are at historical lows – so if you keep too much money in cash you may not even beat inflation with your gains. You will also be missing out on the incredible gains of a bull market should stock prices continue to go up.
The amount of money you keep in cash is up to you and dependent on your risk tolerance. I personally don’t like a lot of risk. If I was getting close to retirement, I’d definitely have at least a year of cash on hand to prepare for the next financial crisis. Having this cash will also help in case of a smaller correction, or other wild swings in the market.
Not One Size Fits All
Obviously, it is impossible to give specific financial advice to everyone in a blog post. That’s not my goal here. My goal is to give you general guidelines so that you can prepare for the pending crash. We don’t know when it’s coming (currently, economists are predicting a recession around 2020) but that doesn’t really matter. We know that it’s out there, waiting, and it’s best to start preparing for it.
Melanie launched Partners in Fire in 2017 to document her quest for financial independence with a mix of finance, fun, and solving the world’s problems. She’s self educated in personal finance and passionate about fighting systematic problems that prevent others from achieving their own financial goals. She also loves travel, anthropology, gaming and her cats.