If you’ve seen the recent headlines, it seems that the next stock market crash could be around the corner. The housing market has stalled and, in December 2018, the Dow had the worst December performance since the Great Depression. All of these signs can be disconcerting, especially when you’re considering the impact to your own finances.
While this doom and gloom may make you feel as uneasy as the recession of 2008, there are some ways you can prepare yourself for a worst case scenario. Check out this guide to help you out if the stock market crashes.
First things first: Do not panic. While you may freak out and consider taking all of your money out of your bank and hiding it under your mattress, this likely isn’t the wisest idea. Likewise, neither is immediately selling off your investments to avoid the volatility of the market. Why? Because if the market can crash, it can go up again.
According CNBC, if you invested in 2008 — instead of panicking — you’d be doing fairly well right now. The CNBC article states:
“In the 10 years since the crisis got rolling, the Standard & Poor’s 500 index has returned 7.8 percent, annualized, including dividends. That’s not far below the very long-term average yearly return of just under 10 percent. So a very unlucky investor who climbed into equities as they were about to careen off a cliff hasn’t been hurt too badly. A standard portfolio mix of stocks and bonds, as reflected in the Vanguard Balanced Index Fund, has returned a decent 6.8 percent over the same span, with roughly half the downside volatility experienced by the S&P 500. Clearly, the passage of time in the markets can help make up for bad timing.”
Cut back on spending
How much do you really need to live off of?
Look at your budget and evaluate areas where you can cut back. You can figure out where you can do this by looking at your bare-bones budget.
Why do this? Because if the stock market crashes, you may need to be a bit more frugal while you wait for a rebound. So, try not going out for coffee every day, but maybe only splurge for those lattes once a week. And, here’s a pro tip: Figure out how much money you need in order to pay all your bills. Once you have your budget set (rent/mortgage, food, transportation, etc.), you can look at the areas that aren’t essential and start to cut back. From there, you can figure out how much you’ve got to spend and how much you can save.
Boost your savings rate
A stock market crash can have a ripple effect on other areas of your life. For example, you may get laid off from your job, have limited access to credit or have a tough time getting clients for your side hustle. For these reasons and more, it’s important to be prepared and have cash saved up.
Experts recommend saving three to six months of expenses in an emergency fund, but you might want to boost that up to 12 months. While this may take some time, there’s no harm in starting to save more as soon as you can.
With beefed up savings, this will help you weather a storm if the stock market should crash.
Assess your risk tolerance
Investing is never a risk-free endeavor. When you’re just starting out, it’s important to determine your risk tolerance, as well as a strategy to grow your money over time.
You may also want to consider any lifestyle changes that may affect the amount of risk you can take on. For example, are you preparing to have a baby, get married, go back to school or going through a divorce? Perhaps you’re dealing with a layoff or you switched jobs and took a pay cut?
Your risk tolerance, as well as these lifestyle factors, should be considered and you can adjust your investing strategy accordingly. For example, perhaps you can move away from a stock-heavy portfolio if having too many stocks makes you skittish. Or, perhaps you can put more of your money into savings. The key is to be diversified in a way that makes sense for you – given your risk tolerance, lifestyles and goals.
Buy and hold
A good strategy in an uncertain market is to buy and hold.
So what exactly is that? Buy and hold is when you buy stocks and just hold onto them. You don’t try to play games or get into a situation you’re not well-equipped to deal with – such as trying to time the stock market.
The ultimate goal with investing is to build wealth, and this takes time. Think of your investments as a long-term play and this way you won’t be so stressed about the possible day-to-day volatility.
Think of it as a sale
Scarcity mindset, or a survival mindset — where you think resources are scarce — can be set off with a stock market crash. You might feel scared about your money, like there will never be enough.
Instead of living in fear and holding onto your money so tightly, you may benefit from a perspective shift. Consider a market crash as a ‘sale’ and invest more. If you feel comfortable, you can use this time to invest on the cheap and reap the benefits in the long term.
Keep your options open if the worst should happen
You’ll want to have a contingency plan if the sh*&^ hits the fan.
So, think about the skills you have in case you have to take a different type of job or start a new side hustle to earn extra income.
Here are some other tips: Check into whether your loans have better payment options available. For example, federal student loan borrowers can pay zero dollars on an income-driven repayment plan if your income is at a very low level.
The financial headlines can be scary. Yet, you can take steps now to be proactive if the stock market crashes. If it does take a tumble, remember not to panic and think long-term. This way your can stay the course and keep your finances in order during the short-term.