Stock Market Crash - Will It Happen Again? - Slimmer Payments

Stock Market Crash – Will It Happen Again?

what do if the stock market crashes

Stocks rise, stocks fall. One thing you can count on in a stock market crash – it will happen again.

Still, a crash can be scary. It’s no fun to see years worth of savings and compounding wiped out, seemingly overnight. Many recently saw this happen as the COVID-19 pandemic caused stocks to tumble. Even as they are rebounding, they can crash again. That is simply the way the market works. However, simply knowing what to do if the stock market crashes and preparing well in advance can help.

With that in mind, here are 5 reasons not to worry once you have those preparations in place:

1. You have a long-term time horizon for your stocks

As a general rule, you should not have money invested in stocks that you expect you’ll need within the next five years – in case of a stock market crash. That minimum five-year time horizon gives you great perspective when the market is crashing. Knowing that you don’t need that money as liquidity to survive the day will help control your emotions during a crash.

2. Make sure you have an emergency fund for you short term needs

You can ride out the inevitable ebbs and flows of an economic downturn, and even a subsequent market crash, if you have an adequate emergency fund. The experts say that your emergency fund should not be part of your “investment portfolio.” Rather, it should be stored in an FDIC-insured savings account or other easily accessible, virtually risk-free format. You should have between three to six months of your expenses in that account, perhaps more if you’re worried about an extended job loss.

3. Ensure you have dividends coming in

If you have stocks that pay regular healthy dividends, then they will continue to do so, despite the market. This is because those dividends are paid on the financial health of the particular company, not the market as a whole. Also, companies will often maintain dividends even during rough patches in their operations as long as they believe the turmoil will be temporary and their balance sheets are strong enough to handle it.

4. You own strong companies that are just getting cheaper

If you have invested in strong companies and their stocks are deep, why not take the opportunity to buy more stock at the lower price instead of a panicked sell-off? Over time, that company’s ability to execute and profit from its business plan is what drives the value of its shares. It is not based on what the market thinks from day to day. Indeed, the best companies often use a market crash as an opportunity to retool their operations, focus on what really matters, and emerge stronger on the other side.

5. You made the right move of diversified investments

No matter how good an investor you are, you will make investments that do not work out. Let’s face it, even Warren Buffett makes mistakes! That’s why it’s important to have a diversified portfolio with investments across multiple companies in multiple industries. When a company you own runs into trouble it can’t fix, you may get hit on that individual investment. However, the impact to your overall portfolio should be recoverable – if you have adequately diversified.  According to The Motley Fool, a decent rule of thumb is 20 stocks across multiple industries to reap most of the benefits of a diversified portfolio.

If you are not following these five tips already, the time to get them all in place is now. Knowing what to do when the stock market crashes before it happens will set you up for success after it occurs.

What is your hedge against a market crash? Please reply using the comments below.

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