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A stock market crash can be a scary event for investors.
But with the right knowledge and preparation, you can survive it.
In this blog post, I will discuss 8 ways to prepare for a crash and the best investments to own during one.
This will give you everything you need to know for how to survive a stock market crash, protect your portfolio, and keep your money safe.
Table of Contents
How To Survive A Stock Market Crash
What Is A Stock Market Crash?
A stock market crash is a sudden and drastic decrease in the prices of stocks.
The widely used definition of a crash is when stock prices fall by 10% or more in a single day.
They can be caused by a variety of factors, such as fear or uncertainty about the future, poor economic conditions, company bankruptcies, and more.
Because of the panic that can occur from a sudden drop, there is a circuit breaker that is triggered when prices get out of control.
This breaker halts trading, hoping to help people become more rational and less emotional.
The breakers are triggered when the market drops 7%, 13%, and 20%.
The key thing to remember is no one has a crystal ball to know when a crash might happen.
Also, crashes tend to happen very quickly, over a short period of time.
Because of this, you need to be ready beforehand, otherwise by the time you realize the market is crashing, it is already too late.
A great example of a crash is Black Monday in October 1987.
Not only did major market indexes in the United States crash, but global markets did as well.
Another example of a market crash is the Great Depression.
This one was a little different in that while there was a sudden fall, stock prices continued to fall over a period of two months.
Understand also that a crash is very different from stock market corrections.
Corrections are a drop of 10% to 20% over a longer period of time and could signal an upcoming bear market.
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8 Ways To Prepare For A Market Crash
While there is very little you can do to eliminate the risk of losing money during a crash, there are things you can do to weather the storm.
Just like when a hurricane is approaching, you board up windows, stockpile food, or even flee the area, you also need to prepare ahead of time for a market crash.
Here are 8 things that should be part of every smart investors preparations.
#1. Review Your Financial Plan
The first thing you need to do is review your financial plan.
You need to understand why you are investing in the first place.
Are the goals you were originally trying to attain still valid?
Make sure your asset allocation still matches your risk tolerance and financial goals.
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If it doesn’t, now is the time to make changes.
Also, be sure to update your budget and cash flow projections to reflect any potential market volatility.
This will help you stay on track during a crash.
Finally, your investment plan will also help you keep your emotions in check and make rational investment decisions.
Not only that, but it can be a helpful tool when convincing your spouse or partner that selling during a market crash is not the best course of action.
#2. Re-Assess Your Risk Tolerance
Along with reviewing your financial plan, you want to specifically look at your risk tolerance.
Many investors tend of underestimate the level of risk they are comfortable taking on.
The best solution to this is to put losses in terms of dollar amounts.
For example, look at your overall investment portfolio and see what its value is.
If it is $250,000 multiply this by 10%, 20% 30%, 40% and 50%.
These are the potential losses you could experience during a market crash.
Here is what each of these would look like.
|Percentage Decline||Dollar Amount Loss|
Are you comfortable losing $125,000?
If not, you shouldn’t be all in on equities and should be putting a portion of your money into fixed income investments.
#3. Pay Off Debt
This one might sound a little odd, but not so much if your financial situation involves you living off your investments.
The last thing you want to do when stock prices are low is to sell.
This is because you have less money invested and less money to grow as the market rebounds.
So before the market tanks, you want to review your finances.
Do you have high interest credit card debt? Any other debt you’ve been carrying?
It might make sense to put your resources to paying all of this off.
When you do this, you need less money to live on, and therefore, you need to withdraw less money from your investment accounts.
#4. Invest In High Quality Dividend Stocks
If you do live off your investments, consider selling some of your equity holdings and buying dividend paying stocks.
The key here is to focus on high quality companies.
Doing this will allow you to earn a quarterly dividend to use as income.
The catch here is that these stocks too will lose value.
But they typically don’t fall as much as other areas of the market because of the stable dividend they pay.
#5. Stay Calm
When a stock market crash does happen, you need to stay calm.
The worst thing you can do is react emotionally.
If you look at your entire life, specifically at the times when you acted out of emotion instead of logic, it was most likely the wrong choice.
The same goes for any investment decision.
You need to stay calm and not make any knee jerk reactions that could cost you more in the long run.
This is goes back to reviewing your investment plan.
The plan is there to guide you during bad times.
So review it and follow it.
Know that crashes happen and the market will eventually recover.
#6. Tune Out The Noise
This is another way of not watching the news all the time.
The reason for this is because the media makes it money by having more viewers.
So they hook you emotionally and you keep watching.
Added to this, the advertisers who pay to show their ads tend to be brokers.
The more you buy, sell, and trade, the more profit they make.
So when times get tough, turn off the television. Stop reading the news articles.
Read a good book or play with your kids. Take a walk even.
The less you focus on the market, the less likely you will be to react.
#7. Move To Cash
This investment strategy isn’t an all or nothing one and it’s not for every investor either.
But in some cases of a market downturn, it might make sense to sell, assuming you can do early enough, to limit your losses.
A good example would be a retiree who needs to take a required distribution from their retirement account.
Instead of risking the market dropping more, a better choice could be to move some money to cash and protect it.
If you know you won’t be scared from investing long term, you could also take some money out and let it sit in cash.
Then slowly start buying back in at a later day.
The biggest drawback to this strategy is no one knows where the bottom will be.
In other words, market timing could cause you to miss out on some large gains.
#8. Invest More
If you think a crash is coming, you could build up a nice cash cushion and then use the money to buy after the crash.
This way you get to buy shares of stock at lower prices, giving you the potential to out earn the markets.
As with the last point, you will never know when the bottom is, so instead of investing everything in a lump sum, it could be more beneficial to dollar cost average instead.
With this strategy, you simply make monthly contributions into the broader market.
This allows you take advantage of short-term volatility and buy more when prices are low and less when prices are higher.
In fact, this is what Warren Buffett means when he said to buy when there is blood in the streets.
Fear causes people to push stock prices down to a point where they become a bargain.
It’s like walking into a grocery store and seeing a once in a lifetime sale on a product you regularly use.
In this case, you would buy as many as you could, not run away.
Best Investments To Own During A Stock Market Crash
Now that you are prepared, what are the best investments to own when the market drops?
Here are the ones that will best limit your losses.
Note that I said will limit your losses.
There is no guarantee you won’t lose money with these ideas. But chances are you will lose less.
Bonds are a type of debt security.
There are two types you can invest in, treasury bonds and corporate bonds.
Treasury bonds are issued the by the government and are the safest bonds to invest in.
Corporate bonds are issued by companies and while still safe, are riskier than treasury bonds.
When you invest in bonds, you fund a corporation or government spending.
In return, they pay you interest over time until the bond matures.
When a stock market crashes, bonds investors typically don’t lose as much money as equity investors.
This is because investors flock to high-quality bonds for safety.
No only do bond prices not fluctuate as much as stock investments, but they also pay monthly interest payments too, helping to boost an investors overall return.
This is why many portfolios have a combination of stocks and bonds to help offset volatility.
#2. Real Estate
Investing in real estate is another safe haven from the stock market.
Historically real estate returns roughly 3-5% annually and very rarely does it lose value.
For example, the Great Recession was more of an outlier than a common occurrence in the housing market.
There are many ways you can invest in real estate too.
You can invest in real estate investment trusts, or REITS, which trade like stocks on the exchange.
You could also buy houses directly and rent them out.
Or you could invest in crowdfunded real estate too.
#3. Dividend Stocks
As mentioned before, dividend stocks are a great long-term investment to help you stay invested and protect your money at the same time.
The key is finding solid companies with a stable dividend.
A smart move is to look back at previous market crashes to see what the company did with their dividend.
Some companies will stop paying or suspend their dividend until the economy improves.
This is a company you don’t want to invest in.
The goal is to earn a dividend while also limiting losses.
If the company stops paying the dividend, there is no reason for other investors to hold the stock and it too could experience a sharp fall in value.
#4. Money Market Funds
Money market funds are very similar to bank savings accounts.
The biggest difference is this investment tends to pay a slightly higher interest rate.
Overall, a money market fund is essentially a cash account where you can park your money safely until you are ready to invest it.
So while it is smart to keep some money in this investment, you don’t want to keep a lot of money here for a long period of time as you won’t earn a return on your money.
#5. Consumer Staples
Finally, you have consumer staple stocks.
These are companies that will still be selling products no matter how bad the economy gets.
Think of things like toothpaste, toilet paper, and food.
These are all things people need, regardless if the economy is booming or crashing.
As with the dividend stock idea above, review how these stocks performed in previous crashes to get a sense of how they might perform this time around.
There are the best ways for how to survive a stock market crash.
By following these tips, you can limit your losses so that you can stay on track for meeting your financial goals.
Plus, you will be better prepared for the next financial crisis hits.
Remember that no matter what, do not panic and act emotionally.
Stick with it long term and know that any crash, no matter how scary it is, will pass.
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I have over 15 years experience in the financial services industry and 20 years investing in the stock market. I have both my undergrad and graduate degrees in Finance, and am FINRA Series 65 licensed and have a Certificate in Financial Planning.
Visit my About Me page to learn more about me and why I am your trusted personal finance expert.