4 things to do to prepare for a market crash
Updated: Mar 2
A bear market is something that financial 'gurus' say is around the corner. A bear market occurs every 5-7 years and we should know how to prepare ourselves for one. Here are my recommendations.
Be systematic in your investments
This is probably the easiest and most important piece of advice. Keep a portion of your capital that you would invest no matter the market price, whether it is up or down. Set up an account in a robo-advisor or a SIP and forget about it. DO NOT look at this portfolio until you retire.
We dont have to be smarter than the rest; we just have to be more disciplined than the rest - Warren Buffet
It is human nature to be fearful. We think it's always early to buy and we should wait for it to drop a tiny bit more. Do not time the market. I explain why to not time the market in detail here.
Diversify your investments as much as possible. Here is somethings you could do:
Equities: Reduce the number of individual stocks you own. If you are bullish on tech stocks then buy a tech-focused ETF or mutual fund rather than individual stocks. It is best if you buy a total market fund but as humans, I understand that you have a bias over an industry.
Bonds: Start investing a portion of your capital in short-term bonds and TIPS.
Real-estate: Interest rates are very low right now. This makes real-estate a very lucrative investment. If you have enough capital then investing in real estate can give you a steady income stream. Make sure it is cash-flow positive and you have enough income to make monthly mortgage payments. Read up more on house hacking to learn how to invest in real-estate such that it is cash-flow positive.
Try to create more side incomes such as consulting, free-lancing, etc. This is very hard to do but the effort is worth it.
Deleverage your investments
Leverage in a volatile market might have made you a lot of money in the past but it won't take long for you to go underwater if things go south. Reduce your debt and your fixed expenses as much as possible. If you are leveraging up or taking debt, then make sure the debt is used to create a revenue stream that is unaffected by the next market crash.
If you need this money in 3-5 years - it’s probably not a good idea to invest in stocks/risky assets. Stay safe.
Do not panic
The stock market is the only market where things go on sale and all the customers run out of the store.
Do not make decisions in a hurry or out of fear. Consult your financial advisor and take a deep breath. Do not get too emotional with your stocks and don't let the fear get the best of you.
Finally remember, the markets always goes up
How you are preparing for the next market crash? Comments below!