The market’s future may be uncertain, but it’s smart to start preparing just in case.
The tides of investor sentiment seem to be shifting, with more investors feeling pessimistic about the future. Just under 50% of U.S. investors are “bearish” about the next six months, according to the most recent weekly survey from the American Association of Individual Investors, with only around 32% feeling “bullish.”
To be clear, nobody knows when the next downturn will begin, how long it might last, or how severe it could be. But stock prices can’t keep rising forever, so we’re bound to face another bear market eventually. Here’s exactly what you need to know, plus three simple things you can do right now to protect your portfolio.
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Is a market crash coming?
Again, the market’s short-term performance can be incredibly unpredictable, and even the experts get it wrong sometimes.
Case in point: Many economists were all but certain we’d face a recession in 2022, with some going so far as to say that it would rival the 2008 financial crisis. That recession never did materialize, and the S&P 500 has surged by 40% since January 2022, as of this writing.
Trying to predict what the market will do in the coming weeks or months can be costly. If you sell your investments now for fear that stock prices will plunge soon, you could miss out on potentially lucrative gains if the market continues to soar. Then if you eventually reinvest after prices have gone up, you’ll be paying a premium for the same stocks you just sold.
Rather than getting caught up in what the market might do, it’s often safer to simply take whatever steps you can to protect your investments against a downturn.
1. Double-check that you’re only investing in healthy companies
Perhaps the single most important way to protect your portfolio is to ensure you’re investing in quality stocks. Shaky companies can often thrive when the market is surging, but they’ll struggle to pull through tough economic times.
Healthy companies, on the other hand, will still usually face short-term volatility, but they’re far more likely to rebound. By building a diversified portfolio filled with strong companies that have solid underlying business fundamentals, your investments have a much better chance of surviving even the worst crashes, bear markets, or recessions.
2. Beef up your emergency fund
If you face an unexpected expense after stock prices have already dropped, pulling money from your investment portfolio is one of the worst moves you could make.
It’s normal for your portfolio to lose value during a market downturn. But as long as you stay in the market until stocks recover, you won’t actually lose any money. If you withdraw after stock prices have dropped, however, you could end up selling your investments for far less than you paid for them — locking in steep losses.
Now is the time to double-check that you have a few months’ worth of easily accessible savings stashed in an emergency fund. By having this cash on hand, it will be easier to avoid selling your investments at less-than-ideal times if you face an unplanned expense.
3. Avoid making any knee-jerk decisions
Even seasoned investors are often unsettled by the threat of a market downturn or recession, and it’s easy for emotions to take the reins. But having a solid strategy — and sticking to it — can make it easier to avoid buying or selling out of panic.
One of the simplest ways to do this is to practice dollar-cost averaging. This is an investing method that involves buying at regular intervals throughout the year, regardless of how those investments are performing. If you happen to buy at an expensive time, that’s OK. Keep investing consistently, and eventually you’ll end up buying at much lower prices, too.
When you put your investments on autopilot, you don’t need to worry as much about what the market is doing right now, tomorrow, or next week. Instead, focus more on how your investments will be doing five, 10, or 20 years from now.
Periods of uncertainty are tough to stomach, so if you’re feeling nervous about the market right now, you’re not alone. By investing in quality stocks and keeping a long-term outlook, though, you’re far more likely to make it through any downturn unscathed.