The stock market has experienced a record-breaking run in the past year. The S&P 500 has risen by almost 70% since the market collapsed in mid-March 2020, and it has been a wild ride for investors.
However, there is a chance that the stock market is heading for another correction. Some investors are worried that this upward trend may not continue much longer, and that the stock market will burst rapidly. If this happens, stock prices could fall and we could experience a full-blown market crash.
It is safe to say that the market will eventually experience a downturn – after all, stock prices cannot continue to climb forever. When exactly that will happen, one might think, but it’s a good idea to be ready no matter what happens. Here’s how I prepare my finances for the inevitable downturn.
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1. I keep my emergency fund strong
It is always a good idea to have a well-stocked emergency fund, but it is especially important during periods of stock market volatility. If you are facing unexpected expenses and you do not have an emergency fund, you may have no option but to sell your investments to cover the cost.
However, if the market experiences a downturn, stock prices fall. If you sell your investments when prices are lower, you could end up losing money.
I usually strive to keep at least six months of savings in my emergency fund. No matter what the market does, I do not have to use my investments to cover unplanned costs.
2. I continue to invest constantly
It can be tempting to invest to invest if the stock market is rocky. However, investing during market downturns can be a cost-effective step.
Because stock prices are lower during market downturns, it can be a great opportunity to buy good stocks at cheap prices. Even if you invest in mutual funds or ETFs rather than individual stocks, you can still get more for your money during the downturn in the market.
Instead of waiting until the market recovers to keep buying stocks, it is a good idea to keep investing as usual, no matter what the market does. If the bubble bursts on the stocks, and the stock prices take a nap, use it as an opportunity to recharge quality stocks without breaking the bank.
3. I maintain a long-term outlook
Stock market crashes can be intimidating, but that’s no reason to panic. Historically, the market has always recovered from its downturn – and it is likely that it will bounce back if a new crash is imminent.
^ SPX data by YCharts.
If you maintain a long-term outlook, it is easier to avoid panic selling when stock prices start to fall. Remind yourself that the market will eventually recover, and that you can dispel the storm.
The key to long-term investment is to ensure that you invest in quality stocks or mutual funds. Healthy companies with a strong business base will be able to survive a downturn in the market, and therefore their share prices must bounce back. As long as you put money behind strong investments, you need to be able to get through even the worst market crashes.
However frightening they may be, the downturn in the stock market is normal. Although no one knows exactly what the future holds for the market, it can be assumed that stock prices will fall sooner or later. By preparing it now, you are ready for anything.