Market Crashes: How To Prepare For a Crash
An explanation of how to prepare for, and handle the emergence of a market crash
The world of investing is pretty eventful, to say the least. It seems as though a majority of today’s markets for many asset classes are moving at unprecedented rates, which should always keep us on our toes. Especially when it comes to the crypto market, you have to always be ready for whatever may come your way and all that it entails. As such, there are specific ways in which you can prepare yourself for the next inevitable market crash while also actively trading. A good investor is prepared for the next bull market, but an expert investor is always prepared in the event that a market crash emerges. So, let’s go over what you need to do in order to best prepare for the next market crash.
This is not financial investment advice.
This article will discuss potential actions to best prepare for a market crash.
Crashes Are Inevitable
Before we discuss how to handle and prepare for market crashes, it’s important to understand that these events are always a part of investing. Instead of looking at the market — whether it be crypto or any other asset — from solely a bull and bear perspective, it’s much more efficient and helpful for your own portfolio to also be aware of the crashes. What many investors sometimes forget is that the attractive long-term returns which they so-often go after include market crashes and all that it entails.
Rather than trying to time the market, it’s actually better to develop and diversify your portfolio based on the assumption that market crashes will at some point in time hit. This way, you won’t be panicking or blindly selling your assets once their prices do drop. Having this mindset going in will separate you from the group of investors who only prepare for bull and bear markets, ultimately giving you more breathing room and time to make the necessary adjustments when that moment does arrive.
Instead of preparing only for the bulls and bears, construct your portfolio with the expectation that a market crash will take place soon. Most long-term portfolio returns take this into account, which will give you less stress when the market eventually does crash.
Organize Your Allocations
As with investing in any other asset class, diversifying your portfolio is key when it comes to being prepared. Now is the time to make sure you have a portfolio that you could live with through a crash. A typical crash will feel very different if you are fully invested in stocks, than if you have some of your portfolio invested in bonds, cryptocurrencies, or other assets. With that being said, it’s important to diversify your portfolio not only by which sector they’re in, but also by which asset class they fall into.
If you aren’t particular enough about how you diversify your portfolio, you’ll experience the worst of both worlds. You’ll likely see the greatest losses during the crash, but also fail to benefit fully from any recovery. If you prepare ahead of time, you’ll be better able to ride out any market events which could significantly impact your potential returns. Remember to make decisions on the side of caution, as you’ll most likely overestimate the extent to which you can survive a crash and the subsequent price drops that come with it.
Additionally, it’s not just about having a conservative asset allocation, but it’s also about how soon you’ll need the money in your portfolio. Even if you are a fearless and disciplined investor, it doesn’t matter if you need to spend down a relatively large amount of your portfolio each year. Irrespective of your temperament, you’ll be a forced seller in a weak market so it’s a good idea to consider having some of your assets more conservatively positioned so that they can serve as a more robust source of cash when immediately needed.
As always, diversification of your portfolio is key in this situation. Allocate your portfolio in a way that takes potential market crashes into account, especially by investing in different asset classes all together.
What Not To Do
While it’s important to be aware of what you should do to prepare for a market crash, it’s just as — if not more — important to understand what you shouldn’t be doing to effectively prepare for a crash. First of all, you should be aware that there’s no fully accurate way to actually predict how the market moves. Don’t invest in an asset if your only premise is the hope of a following bull run, which is not something you should be timing for the short run, Always think long-term, as believing that you can predict an unknowable future could be disastrous for your financial health.
Another mistake you should avoid is incorrectly preparing for a market event which may not happen for months, or maybe even years. Never take investment advice from others if it has to do with how the market will perform in the future. No matter how analytical their evidence may be, there’s no way to accurately predict how the market will perform. The only thing you should be listening to is to your own intuition and facts about how the market is currently behaving.
No matter how plausible any given situation may sound, there is also a chance that things move in the opposite direction. Your own portfolio could be completely destroyed if you make this mistake and find yourself panicking under all the losses. Of course, this will lead you to sell off your positions if you don’t wait for the long-term, further skewing your asset allocations.
Do not take investing advice about how the market will perform from anyone, as there’s simply no accurate way to time the market. Also, never prepare for an event that you think may impact the market, as it could never happen and will leave you with a skewed asset allocation.
Learn & Move On
One of the most important things that you could do when preparing for a market crash is learning from your own and others’ mistakes. Experience is one of the most helpful things to have when investing, but it won’t mean anything if you don’t actively assess your own decisions that you make in preparation for a market crash. Not all market crashes are the same, which also applies to the way that they emerge. So you can expect to encounter different indicators, factors, and events that could trigger a subsequent market crash.
Recall and track each decision that you do and do not make when preparing for a market crash, as it could help you out when the next one happens. Again, none of what you do will matter if you aren’t analyzing your decisions to see what caused what and even what you could have done to get better results. If you want to get better at investing over time, be methodical about each decision that you make so that you continue to make more informed decisions as time goes on.
Keep track of what decisions you do and don’t make when preparing for a market crash, as it could help you for the next one. Don’t simply be relieved when you pass one market crash, as more are yet to come eventually.
Nobody wants to deal with a market crash, as it completely ruins the sentiment that investors have towards the market. Yet, this is a part of life and should be prepared for at all costs, even if that means changing the way you allocate your portfolio. Good investors will be prepared for the bears and the bulls, but investing experts will always be ready for anything that comes their way, especially market crashes. By diversifying your portfolio and being as methodical as possible when it comes to making decisions, you will be well-prepared for whatever the market throws at you and should be on your way towards achieving the desired returns.
What are some other ways that you prepare for a market crash?
Let us know in the comments!