Market crash is often a scary time for most investors. Looking at your portfolio dropping 50% is definitely not fun. But can this be avoided?
Should all investors regardless of age get fully invest and ignore the fluctuation of the market, or should we get all our money out of the stock market and wait for the market crash?
Investors of different age should prepare for the market crash differently. A young investor and an investor who is nearing retirement have different concerns, thus will have different priorities.
Here is my take on what you can do to prepare for market crash for investors of different age. You can use this as a guide, but the choice is yours.
How to prepare for market crash by age
Market crash is unavoidable, it is not a matter of ‘if’ but a matter of ‘when’. It is almost impossible for any investors to know when a market crash is coming, not even the pros working in the wall street knows.
But if we don’t know when the market crash is coming, how can we prepare for it, and let alone prepare for the market crash according to our age?
The solution is simple, we strategist a way of investing, where we can be prepared for the market crash anytime.
We allocate our investment based on risk and needs.
A young investor have years ahead of them to recover from the market crash, thus these group of investors have a high risk tolerance.
On the other hand, an investor nearing his/her retirement will have much lower risk tolerance.
Here we will prepare each age group of investors for the market crash based on your risk tolerance level and needs:
- Age 20s to 30s
- Age 40s to 50s
- Age 60s to 70s
1. Prepare for Market Crash at 20s to 30s
Risk Tolerance: High
Debt Level: High
Years to Retirement: 40 to 50 Years
20s to 30s are the best time to invest. As a young investor you have almost 40 to 50 years till your retirement. Your risk tolerance is much higher than investors of any other age group. But your debt level is also one of the highest amount the different age groups.
First, you should repay all your debts. Before you should invest your money into the stock market, you should always make sure you are free from any bad debts.
Study loan for an example, it generally have an interest rate of 4% to 6%. By repaying your school loan, you are basically saving yourself from paying that 4% to 6% interest rate. This is the same as investing and getting a 4% to 6% return. The difference, by paying the debt, you will sure get an positive return on investment. On our other article, we will show you, “How to get out of debt step by step“.
Next, you have to prepare for an emergency fund. Ensure, you are covered financially and will not be forced to take up some bad debts which can cost you your future.
An emergency fund will not only let you sleep like a baby at night, it can actually save you from lots of financial worries.
Lastly, when the market is raging and almost all good stocks are overvalued, your best action:
Yes, you should do nothing when the market is overvalued. Avoid the greed that controls the other thousands of investors.
Instead, save up your cash in a high interest saving account and wait for the opportunity to present itself.
When the market crash, put your money into some amazing stocks and watch it grow when the market recover.
2. Prepare for Market Crash at 40s to 50s
Risk Tolerance: Mid
Debt Level: Mid
Years to Retirement: 20 to 30 Years
At 40s to 50s, you are now at middle age and free from most debt. Most likely, you will have a sizable amount invested in the stock market. You will be having around 20 to 30 years before retirement and this is a critical time of your life.
First, you should consult a financial advisor to do a review of your investment portfolio. Unlike when you are younger at your 20s and 30s, your risk tolerance is lower and have to prepare for your retirement. Re-balance your portfolio to keep your tolerance for risk at the most comfortable level.
Remember, the biggest mistake for investors at this age is to sell at the bottom of the bear market. Mistakes like this can affect you retirement plan and personal finance greatly. Articles here at incomebuddies.com can help you to avoid these costly mistakes.
As for retirement, remember to calculate how much do you need to retire or you can check our article on “how much you need to retire” to get an idea of your final goal.
Then, ensure you will have enough cash reserve for any unexpected expenses. At this age, it is best to prepare an emergency fund of at least 12 months worth of expenses.
Your kids school tuition and fixing up that car which just broke down last week can be pretty expensive, and you don’t want to be forced into a situation where you will need to sell your stocks during the market crash.
Finally, set aside a sum for investing when the opportunity arise. During the market crash, you will have the opportunity to buy some of the best stocks at a cheap price. My suggestion is to buy some dividend stocks, these can help to generate you passive income when you retire in the future. Check out our other post on “how to find good dividend stocks” after this.
3. Prepare for Market Crash at 60s to 70s
Risk Tolerance: Low
Debt Level: None
Years to Retirement: 10 Years
At 60s to 70s, you are now close to retirement or have already retired. You have work hard for the most of your life, and have build a nest egg large enough to support your retirement life without worries. You have no debt in your name and is ready to enjoy the golden years of your life. Or so you thought.
Stock market have huge upswings and down swings, and it is bad for the heart for investors of your age. It is also important for you to avoid some of the worst retirement mistakes.
Now, it is the time to re-balance your portfolio to the lowest risk possible.
You don’t want to have any nasty surprise where the stock market just wipe out half of your retirement fund.
You want your retirement to be worry-free and having a stable stream of cash flowing into your account. To achieve this, investing in stocks that pays dividend can be a good option.
My suggestion is to place most of the investment in low risk, low fee, highly diversified Exchange Traded Fund (ETFs). With an average of 2% to 5% dividend per year, these are one of the best investment you can park your money during your retirement without the worry of market crash.
Lastly, avoid the temptation of cashing out all your investment. According to the most recent research, your average lifespan will be around 81 years old for Male and 83 years old for Female. You may have another two to three decades to live. So, you need to ensure you will have enough to last you a life time.
At different age group, investors should prepare for the market crash differently according to their priorities.
- At 20s to 30s, you should first pay off your debt and then invest when opportunity comes.
- At 40s to 50s, you should ensure you have enough cash reserve for any unexpected events before investing.
- At 60s to 70s, you should ensure your investment are protected from market crash and set the risk level to the lowest. This is to prepare for your retirement.
Kopi Buddy is personally in the first age group and is preparing for the next market crash. If you want to know how to prepare for the market crash and profit from it, you can read this article on “How to profit from Market Crash“.
Each investor have different risk appetite and investing style.
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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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