If you know your portfolio was going to drop by half tomorrow, what will you do?
Do you sell all of your investments?
When the so-called expert of the stock market are “crying wolf” ever so often, it is clear that we are not 100% certain what will happen to the market’s short-term movement.
Timing the market may not be the best strategy for the retail investors like us.
If timing the market is not an option, the next best thing is probably to be prepared for a market crash.
There are often many signs of a market crash before the market crash happens.
I have actually written an article about some of the most important Warning Signs of Stock Market Crash that you can see before the market actually crashes.
After you notice these warning signs of the market crash, it is only right for you to be prepared for the crash. And minimize the impact of the crash to your financial health.
prepare for stock market crash
Preparation is the key to successful investing. The best time to prepare for a market crash, is before the market crash. Not during, not after, but before the crash. The next best time to prepare for the market crash is now!
Being prepared for the next market crash is especially important for investors who aspire to make money at a bull market, and minimize losses at a bear market.
Reacting in the moment of a market crash can lead to costly mistakes.
Often we hear retail investors recite the mantra.
‘Buy Low, Sell High!’
But in reality, what retail investors do are exactly the opposite!
‘Buy High, Sell Low!’
Greed makes people buy and fear makes people sell.
A bull market makes people greedy and wanting to earn more, thus buy high.
A bear market makes people fearful and wanting to cut losses, thus sell low.
If you want to avoid losing money because you, ‘Buy High and Sell Low’. We may have the steps for you to help in minimizing the financial impact due to the next market crash.
There are 2 Rules to investing.
Rule 1: Don’t loss money
Rule 2: Don’t forget Rule 1
Wisdom of Warren Buffett
This step-by-step market survival guide will show you how to prepare for the upcoming market crash that is just around the corner.
Here are the 3 Simple and Proven Steps taken by many successful investors you should do right Now.
Lets Dive In!
Read Also: 7 Deadly Sins of Investing for Beginners
1. Know Your Finance
First, you should always consider your own goals before making any investment decision. Ask yourself these few important questions before making any drastic move in your investment portfolio:
- Am I in need of cash in the next One, Two or Three years time?
- Am I saving for my kids who are going to colleague the next year?
- Am I retired, or close to retirement and these cash is for my retirement?
If you say ‘Yes’ to any of these 3 important questions, this is important. Because this article will probably help you make better choice for your investment journey.
- If you need cash for the next 1 to 3 years time (I will use 5 years for a safer choice), it means the stock market is not for you. A typical cycle of the stock market takes on average of 10 years, and 1 to 3 years is way too short.
- If you are saving for your kid’s future college expenses, you should really reconsider and is really not advisable to invest your kid’s future education in such a risky investment such as stock.
- If you are retired or close to retirement, probably you may want to consider reducing to a lower percentage of equities, in your portfolio since they can be more volatile.
It is not uncommon for the stock market to drop 50 percent of its value in a market crash. Which means your investment of $10,000 today could mean it become $5,000 the next month due to the market crash.
The worst market crash that occurs recently was in the year 1929, ‘The Wall Street Crash’.
During the Great Depression, the market dived 90 percent, and lasted 12-years that affected the Western world.
According to statistics complied through the different market crash:
A stocks an average takes 121 days, or approx. four months, to recover from a correction, where the stocks fall 10 percent or less from a high.
A stocks an average takes 22 months, or almost 2 years, to recover from a bear market, where the stocks fall 20 percent or more from a high.
Ben Graham, the Father of Value investing, the mentor of Warren Buffett, richest and most successful investor in the world once said:
“In the short run, the market is a voting machine but in the long run it is a weighing machine.”
Your financial situation can be very different from the person sitting next to you, know your family’s specific situation before choosing how to invest. Risk is very subjective.
If you don’t want to ‘Sell Low, Buy High’, this must be the first step you should take.
Fear and Greed are the reasons why people ‘Sell Low, Buy High’, when they should be ‘Sell High, Buy Low’.
Investing in a stock market is not for everyone, only those who can afford to take risk should invest.
Because “In the short run, the market is a voting machine but in the long run it is a weighing machine.”
2. Reduce Leveraged
Leverage is risky for investing. Many investors have substantial exposure to leveraged investments, such as to borrowed money to invest in stock market or in properties. When the market is good, you can earn more by leveraging, but when the market turn sour, you can loss everything; your money, your time, your financial future.
Greed is neither good or bad. Greed is just human nature. But being greedy before a market crash where you over leverage your financial situation is basically waiting for a disaster to happen.
Warren Buffett thoughts on leverage during his interview with CNBC:
“It is crazy in my view to borrow money on securities, it’s insane to risk what you have and need for something you don’t really need.”
Warren Buffett don’t agree to use leverage on investing in stocks even during the good times, where it is a bull market. Let alone using leverage before a market crash and during a bear market.
Leverage on stocks is what cause people ending up in bankrupt during financial downturn and during the market crash. Leverage is a risk that we as prudent retail investor should not take or limiting the risk during our investing journey.
During a market crash, leverage simply means:
“Turning your winning into losing, and your losing into deep in debt.’
Whatever you borrow, have to be returned, and when you couldn’t return what you have borrowed, declaring bankruptcy maybe the only option left.
Reducing your leverage is an important step you should do before a market crash.
Reducing leverage is the most important step you should take right now. Especially, when you see the different signs of market crash.
You have to get ready for the worst.
Leverage can aid you or destroy you, and this is basically summarized in a simple sentence said by Warren Buffett:
“I’ve seen more people fail because of liquor and leverage, leverage being borrowed money. You really don’t need leverage in this world much. If you’re smart, you’re going to make a lot of money without borrowing.”
Warren Buffett disapproved of leverage on stock investing and so am I. Leverage can be the reason that destroy your financial health.
Read Also: What Type of Value Investor Are You?
3. RE-BALANCE Your Portfolio
Rebalancing a portfolio means to adjust the weightings of the different asset classes in your investment portfolio. Rebalancing can be achieve by buying and selling assets according to your risk tolerance level.
Re-balancing your portfolio is something you should do every year and especially when you want to prepare for stock market crash. This is what differentiate a pro investor from the amateurs.
Re-balancing your portfolio correctly can let you survive the market crash and live to invest another day.
Many who don’t re-balance their portfolio usually got hit the hardest during a market crash, which literally crashes their finances during the bear market.
Investor who is 100% invested in high risk, high volatility stocks will have most their money lost in the stock market crash.
Investor who re-balance their portfolio and invested in a variety of investment such as, defensive stocks, bonds and other less volatile defensive investment such as gold will be impacted less during the market crash.
“The best time to re-balance your portfolio and work out your allocation for each asset class is yesterday. And the next best time is now.”
Financial advisor are the best people to get advice for your personal financial goals.
Most financial advisor have fiduciary responsibility to their clients where they have the legal responsibility to have their best interests to their paying clients.
You can probably look for your financial adviser and request for a rebalance of your portfolio to a less risk portfolio that may help you survive through the market crash.
If you are invested through Robo Advisor, you can probably change your setting in your Robo Advisor platform on your own to a ‘low risk portfolio’.
The Robo Advisor will automatically re-balance your portfolio; to exposed less to high risk, high volatility investment vehicles, such as small cap or penny stocks, and increase exposure to defensive investment vehicles such as gold and some certain blue chip stocks.
You can also learn more about Robo Advisor in my other Article on explaining: “What is Robo Advisor? What are the pros and cons of Robo Advisor?”
Alternatively, if you loves to do your own investment. And are passionate to learn the art of investing. You can do your own re-balancing of your portfolio and make the right allocation of your investment in the most suitable investment vehicle; Stocks, REITs, Bonds, Gold and Commodities.
How you allocate your investment, depends on individual and preference, but there are some proven ways of allocation used by the pros that we may want to explore in our future articles.
PS. I will generally cash out my profit if I know a market crash is coming. How about you?
Re-balancing your portfolio keeps you in track of your goals and it is critically important to perform re-balancing before a market crash occurs.
If you don’t, you will risk to see the massive losses of money during the crash, and what’s worst, you will also miss the opportunity to fully benefit from the recovery that comes after the market crash.
Rebalance your portfolio ensure you will be prepared for any uncertainty that might happen in the market. A market crash or not, if you are prepared, you can sleep soundly at night.
“Prepare, Prepare, Prepare!”
Successful investors prepare for market crash
Raise and fall of a market cannot be avoided. Like gravity, what goes up, will come down.
If you want to be a successful investor in both a bull market and a bear market, preparation is the key.
In every major or minor market crash, we learn from our mistakes and make adjustment and changes.
Experience is one of the most helpful things you can have when investing, but it won’t mean anything if you don’t act and prepare yourself fully for the market crash.
Smart investors who are prepared often profit from a market crash while other unprepared investors losses all their money when the stock market crash.
Here are the 3 Steps you need to do to prepare for the Market Crash:
- Know Your Finance
- Reduce Your Leverage
- Rebalance Your Portfolio
Next we shall talk about how can you profit from a Market Crash legally and morally.
Question: “Are you prepared for the market crash?”
“It’s only when the tide goes out that you discover who’s been swimming naked.”
Wisdom from Billionaire Warren Buffett:
When times are good, everyone seems to be a winner.
When times are bad, you will know who is truly the winner.
Success is not made overnight, but through determination and the conviction to keep learning and getting better.
Here are some resources that can help guide you to success.
- Investing Books to Riches
- Business Startup Books
- Leadership Books for aspiring Leaders
- Sales Books to Wealth and Success
- Life Changing Books to a Future of Success
Taking your First Step is always hardest, But it is the most important step to greatness!
Ultimate Stock Market Crash
Part 1: Signs of Market Crash
Part 2: How to Prepare for Market Crash
Part 4: How to Profit from Market Crash
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