A stock market crash is coming. 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 first step is understanding market crashes and how they can affect your finances.
What is a Market Crash?
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 substantial economic ramifications, 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, as they often cause disruptions in the labor market, job losses, bank failures, and investment portfolio losses.
Preparation is vital to weather these storms.
How to Prepare for a Market Crash
The steps to prepare for a crash vary wildly depending on your situation. However, general guidelines do apply, as most people fall into one of three basic categories:
- Lots of time to invest; secure job
- Lots of time to invest; not-so-secure job
- Not so much time to invest/retired
Everyone’s situation differs, so some people don’t fit these categories. If that’s you, check out the one that’s the best fit, and head out to a personalized financial advisor if you need more specific advice.
Remember, we aren’t financial advisors, so everything below is general information and should never be considered as specific investment advice.
Lots of Time to Invest; Secure Job
If you have a lot of time to invest and 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 economies, you have much less to worry about if the stock market crashes.
You also have a lot of time to recoup any investment losses.
To prepare for a stock market crash, check your holdings. Ensure your individual stock holdings 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).
You should also put some cash reserves aside to prepare for the big fire sale on stocks!
Next, make sure your financial house is in order. Establish an emergency fund and invest in a retirement account. Maintain these accounts whether the market is up or down.
Lots of Time to Invest; Not-So-Secure Job
Unfortunately, a market crash and recession could lead to job losses in various industries. If you work in an industry at risk for job losses and lay-offs during an economic collapse, you must start preparing 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
Make Yourself Indispensable
The first thing you should do to prepare for a market crash if your job isn’t secure is to make yourself indispensable. If a company must make the hard choice to lay employees off, you want to ensure you’re at the bottom of that list.
Improve your skills with courses related to your industry. Many online learning platforms offer niche career certifications that may keep you safe should layoffs occur.
Take on special projects outside the normal scope of your work. Learn how each department works together so you can pick up some slack if the company needs to downsize.
Learn an essential system inside and out so everyone relies on you to operate or fix it if things go wrong.
A smart manager would try hard to keep the most essential employees.
Update Your Resume
Some downturns wipe out entire industries. Companies go belly up, and even the most indispensable employees find themselves out of work.
Start updating your resume today to make yourself hireable in related industries. Add those online courses you took and those niche certifications you acquired.
Ensure your resume reflects your current job title and all the extra responsibilities you take on in related fields.
Having an up-to-date one will ensure that if you lose your job, you can find a new one quickly.
Build Your Emergency Fund
An emergency fund is essential to surviving a market crash, but you must build it beforehand.
Standard financial advice says you should have 3-6 months of living expenses saved in your emergency fund, but if your industry is at high risk for layoffs, you should aim for the higher end.
A well-funded emergency fund will help you survive if you lose your job, but also consider it a safety net if the next job you find pays less. Many people take what they can get just so they have income coming in, and the emergency fund can help you fill the gaps until you find a higher-paying job.
Create Additional Income Streams
An additional income stream can help fill the gap if you suddenly find yourself unemployed. Turn a hobby into extra cash, or pursue one of the many ways to make money online.
Starting a side hustle will help you earn extra money, which you can use to build your emergency savings account while still employed, and which can provide vital income should you lose your primary job.
If you want to start a side hustle but need help figuring out where to begin, check out this fantastic course, Launch Your Side Hustle. It’s the best resource for building 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 investing long-term, you shouldn’t worry much about stock market prices, even during a downturn. While you can, you should continue contributing to your retirement accounts as you normally would. And if you can, you should still contribute during a market downturn – that’s when you will get the best deals on stocks!
However, I caution against owning individual stocks unless you are a skilled investor. There’s so much volatility on Wall Street. A company might be doing well one day, and the next day they are filing for bankruptcy. You could lose all of your money in a giant sell-off. You never know what will happen.
If your job isn’t secure, a diversified portfolio is essential. Diversification will ensure you won’t lose big on individual investments should companies go out of business.
Preparing for a Market Crash Without a Long Time Horizon
Your preparation will look a lot different if you don’t have time to recoup any investment losses. If you are at or near retirement, you may want to transition riskier holdings, like stocks and index funds, into safer investments, such as bonds or cash reserves.
Safety is essential for the money you may need in the next five to ten years because the market may take too long to recover from a crash.
The downside to reallocating is that you could miss out on some gains if you do it too soon. The market is still experiencing record highs, and we don’t know where the peak will be. It’s impossible to time the market, and only a stroke of luck will ensure you put your money into the relative safety of bonds and CDS right before the market crashes.
If I were just a few years from retirement, I’d start safeguarding about fifty percent of my nest egg against a crash. I’d ensure 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 the benefits of buying on sale during a downturn.
A financial advisor is the best resource for deciding how to secure your nest egg in the face of economic insecurity. Speak to an advisor about your risk tolerance and retirement goals to determine an appropriate allocation.
The Risk of Cash Reserves
Of course, as with everything, there is risk involved. Although they’ve been rising for the past years, interest rates are still relatively low compared to inflation. If you keep too much money in cash, your gains won’t beat inflation. 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 is dependent on your risk tolerance. I personally don’t like a lot of risks. However, if you’re close to retirement, consider keeping at least a year of cash to prepare for the next financial crisis. This cash will also help in case of a smaller correction or other wild swings in the market.
Not One Size Fits All
Everyone’s financial situation is different, as are their life goals, retirement goals, and risk tolerance. No online resource can possibly cover every unique situation – that’s what financial advisors are for.
However, you should always think about the next market crash. Nothing goes up forever, and we’ll likely experience one in the next few years (if not sooner).
Start preparing for the pending crash today, and you’ll be in a much better position to ride it out when it inevitably strikes.