The very nature of the market means a market crash always comes sooner or later. Although rare, a crash can wipe out a lifetime of savings extremely quickly. In order to safeguard your investments, it’s time to think about implementing certain safeguards that will keep you from losing it all.
Diversification is essential for a successful investment strategy, but it’s especially useful for market crashes. You shouldn’t have all of your investments in just stocks; instead, put about 40 percent of your investments in bonds and other financial investments that tend to rise or remain stable when the market is crashing. Even when you invest in stocks, you need to make sure your money is spread over different sectors, preferably in a broad index fund, which will cushion the impact of a market crash.
Know When to Cut Your Losses
Protecting your principal during a crash should be one of your primary goals, especially if you’re nearing retirement. While you shouldn’t dump all your investments at the first sign of trouble, you should have a predetermined plan about when to exit the market. This is where having a financial planner can help you understand where your pain points are and even build “stops” into your portfolio.
Use Conservative Investments
Although it’s probably unwise to put all your money into CDs and Treasury bonds, it’s important to have a certain amount of your money tied to secure investments. Indexed annuities are also a good choice; they can provide better returns than Treasuries. For stock investors concerned about a market crash, blue chip stocks are the way to go. Although they will likely take a hit in the case of a market crash, they usually offer a fixed dividend payment and tend to remain stable even in a falling market.
Investing With Hedges
While bonds and T-bills can provide a certain amount of hedging, investors with a higher risk appetite can think about shorting certain stocks or purchasing options on a stock. However, these options are for advanced investors.
Most people don’t invest when the market is falling, but you should have a plan in place to invest a certain amount of your money. That means reinvesting your dividends into the stock market or a certain percentage of your income, which will help you buy in while it’s cheap.
So far, every stock market crash has been followed by a stock market bounce. However, you still need to protect yourself. Use the above tips to not only secure your investments but even potentially make some money out of a crash.