Last week, we wrote about the impending stock market crash; so this week we thought it would be a great idea to tell you how to prepare for it! Because like I said, it’s definitely coming. We just don’t know when.
Being prepared for a stock marked crash is definitely not a one size fits all type of thing. The steps you should take to prepare yourself vary wildly depending on your individual situation. Because of that, we are only going to give general instructions 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 drop a comment if you still need some advice. The general categories are:
Lots of time to invest with a secure job
Lots of time to invest with a not-so secure job
Not so much time to invest/retired
How to Prepare for a market Crash
Lots of time to Invest with a secure Job
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 (I recommend investing in index funds over stocks in general though!). You should also be putting some cash reserves aside so that you are ready for the big fire sale on stocks!
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 things 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 at an industry that is at risk for job losses and lay-offs, you need to be preparing now for a stock market crash.
There are a few things you can start doing to make sure you are ok if your industry suffers in the next recession. First, you can make yourself indispensable at work. Continue increasing your skills so that if downsizing comes, you will be spared. Update your resume to ensure that if you do lose your job, you will be able to find a new one quickly.
Next, you need to shore up 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 your 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 third 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 be super handy if you lose your main job. The point is the time to make these preparations is now, before the market crashes and before your job is at risk.
As far as investments go, if you have a lot of time to invest, you shouldn’t worry much about your losses. You should continue contributing to your retirement accounts as you normally would, and only adjust your holdings if you are invested in individual stocks that are at risk during a downturn. If you stay invested, you will most likely recoup any losses.
Not so much time
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. 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, 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.
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.