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How to Protect Yourself from a Market Crash

Posted on Monday, February 17th, 2020 by Sean Sechler

How to Protect Yourself from a Market Crash

Currently, we find ourselves in one of the strongest bull markets in history. This has led many investors to start thinking about the potential for a market crash. The truth is that predicting the precise time of a market crash is extremely difficult. We simply aren’t able to determine exactly when a market correction or crash will occur, which is why it’s important to focus on the present reality and the facts. Economic expansions and bull markets do not last forever. It doesn’t matter if the next recession happens next month or in five years’ time, as long as you can accept the natural movements of the economy, you can stay prepared to weather any economic storm.

The downside risk is simply a part of investing. The sooner that you are able to accept the risk of a market crash, the better your decision-making process will become. Protecting yourself from a market crash doesn’t mean selling all of your investments immediately and running for the hills. It’s about educating yourself and preparing for the future in logical ways. We are going to help you figure out the best course of action to prepare yourself for a market crash below so that you are always confident in your investing activities, regardless of the current situation in the market.

  1. Focus on Diversification

Diversification is one of the fundamental concepts of successful investing. It can really pay off to have a diversified portfolio during a market crash. You should be focused on diversifying in a strategic way from the beginning of your investment journey. Taking positions in assets like real estate, bonds, derivatives, cash, and even precious metals along with equities can help you reduce your exposure to market crashes and protect your nest egg during times of extreme volatility. It’s always a good idea to consider rebalancing your portfolio if you anticipate a market crash or correction coming up.

  1. Remember that Cash is a Position Too

One of the important things to remember about investing and trading is that cash is a position too. If you have a bad feeling about the market or want to lower your risk levels and market exposure, you can always liquidate some of your holdings. This tends to be a common move for traders when markets become more volatile due to economic news or political risk. The idea is that you can hold cash instead of taking the full exposure of a market crash and buy back in at lower price levels whenever you are ready.

  1. Keep Debt Levels Low

Most people that are trying to protect themselves from a market crash tend to focus only on their assets and investments. This makes sense because a bear market or crash will directly impact a stock portfolio. However, it’s also a great idea to take a look at any debts you have ahead of a potential market crash. Try to keep your debt levels low so that you can weather the storm during a stock market crash. There’s nothing worse than losing money in stocks while also having to pay off your high-interest debts.

  1. Consider Hedging

If you are extremely confident that a market crash is on the horizon in the near future, you can take action to profit off of a downward move or limit your downside risk. There are several ways to do this depending on your own levels of risk tolerance. Perhaps you might consider purchasing put options or shorting a stock that you think will be affected immensely by a market crash. There are also leveraged ETFs and inverse ETFs that you might want to explore as well if you are interested in hedging.

  1. Keep a Long-Term Mentality

Ultimately, you need to accept the fact that volatility is simply a component of investing. There will be market downturns and even sharp corrections that can certainly hurt your portfolio in the short-term. However, it’s vitally important to maintain a long-term view when it comes to investing so that you are able to ride out market downturns and not lose sight of your investing goals. Part of preparing for a market crash is accepting the inevitably of ups and downs in the market.

Protecting yourself in a market crash is not as difficult as you might believe. Instead of trying to call market tops or bottoms, you should keep the tips mentioned above in mind and constantly work on expanding your market knowledge. That way, you will be able to react in a logical and intelligent manner during the next big market downturn.

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