There’s no point in worrying about a stock market crash because you know at some point, it’s going to happen. The stock market undergoes a correction of at least 10% about once every 1.84 years. Major crashes, like the COVID-19 crash of 2020, happen about once a decade…
Since you know it’s coming, the only thing you can do is prepare. Here are five ways to be ready.
1. Get your emergency fund in shape
The best defense against a stock market crash is a healthy emergency fund. A cash buffer protects you from having to sell investments at a loss should you lose income or encounter an unexpected expense after the market has tanked.
Ideally, you want enough cash to cover six months’ worth of expenses stashed away. A six-month emergency fund isn’t built overnight, so saving six months’ worth of expenses before the next stock market correction may not be realistic. But if you can find any extra money in your budget to put toward savings, even if it’s only an additional $25 or $50 a week, you’ll be better prepared.
2. Make sure your winners haven’t gotten too big
You may think you have a diversified portfolio just because you own a bunch of stocks. But your investments may not be as diversified as you think, particularly if you’ve had some big wins recently. You may find that your winners now account for an outsize share of your portfolio, which can leave you vulnerable to a crash.
That doesn’t mean you should shed your top stocks. But you might want to keep the same amount invested in your winners while using the earnings to diversify your portfolio. That’s what Warren Buffett did when he cut Berkshire Hathaway‘s (NYSE:BRK.A) (NYSE:BRK.B) investment in Apple (NASDAQ:AAPL) modestly in 2020. He used the extra cash to diversify with four drugmaker stocks, plus Chevron (NYSE:CVX) and Verizon Communications (NYSE:VZ).
3. Avoid investing on margin
It’s often tempting to increase your buying power by investing on margin. With margin, you basically borrow money from your broker to buy more stocks. If your broker has a 50% margin requirement, you could invest $1,000 of your own cash, plus $1,000 of your broker’s cash in a stock.
If the stock rises 25%, you’d pocket 50%, not including the interest you pay on the margin loan. But if the stock…
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