A stock market crash happens about once every few decades (depending on how you define it). This means that you’ll see at least one stock market crash — or a steep fall that’s near a crash — in your lifetime. Do you know how to handle it?
Asking “Is the stock market going to crash?” is actually pointless: It will eventually, no matter what. Instead, you can prepare yourself for the inevitable by knowing how to recover if it does.
In this guide to stock market recovery, we’ll show you how to protect your earnings and get through this situation with minimal trouble. Keep reading to learn what you need to know!
Getting Prepared Before a Stock Market Crash
Even while the market is healthy and normal, there are a few steps you can take to prepare yourself for a possible future crash. Let’s take a look.
1. Research Your Investments
It’s very important to understand all of your investments well, even if you aren’t an active trader. Which stocks do you have, and why did you choose them specifically?
It’s a good idea to start creating a notebook or online document where you record details about your stocks. Note down the positives and negatives of each investment, as well as the reasons you invested in the first place.
You’ll need to keep this document updated as things change. Over time, it will become a valuable record of the reasons to keep a certain investment — even if the market crashes. For example, a thriving company that has survived many obstacles will likely still do well through a crash.
On the other hand, if your records show the negatives of an investment starting to outweigh the positives, you can sell those investments before a crash even happens. Having a stable portfolio that you understand well will help you navigate any future crashes.
2. Maintain a To-Buy List
Some highly desirable stocks might be out of your price range for now. But if there’s a crash, the price will fall, putting them within reach.
You can take advantage of this situation if you already have a working list of the stocks you would want to buy. Document every company you want to invest in that you can’t afford to yet. If you can, set aside some excess funds that you can use to buy when the time comes.
3. Diversify Your Portfolio
Diversity is always good investing advice, and it can also help get you through a crash.
Always think about rebalancing so you can have the best possible breakdown of investments. For example, consider investing in small- and medium-sized companies, not just large players.
While it’s also possible to diversify during or after a crash, you’ll put yourself in a better position if you start early.
4. Target the Right Companies
On the above note, targeting the right companies can help you weather a crash more effectively — so let’s take a look at exactly how to do it.
The companies that survive crashes best tend to sell things that people will keep buying, no matter how bad the economy is. These include things people won’t give up (like alcohol), and the things they actually can’t give up (like groceries).
What to Do After a Stock Market Crash
If the stock market does crash, hopefully you’ve already prepared with the above steps. But either way, here’s how to handle the recovery process.
1. Understand That Risk Is Part of the Game
Part of the benefit of investing is taking a risk in order to grow.
Even though the market has dipped low in many periods of history, it always bounces back higher than before, given enough time. A crash looks scary, but it’s just part of the inherent risk. Your job is to manage those risks wisely and come out on top.
Remember that when faced with the negative side of risk, your emotions often get involved. Trying to stay objective will help you navigate these choppy waters.
2. Stay the Course
With that objective viewpoint in mind, your best bet (at least at first) is to do nothing at all.
Don’t make fast, emotion-driven decisions, such as selling stocks when the market turns down. Remember that it’s only a matter of time before it climbs again.
In fact, some of the strongest upward turns often happen right after a crash. If you sell now, you’ll miss out.
3. Buy New Stocks
Now’s a great time to buy some stocks from your to-buy wishlist. Consider this a stock-market sale: you’ll get great deals during a crash!
Remember that the market will bounce back, so these deals won’t last forever. Buy what you can while the crash is in full swing. Don’t try to predict the actual low point — that’s nearly impossible. But start buying fearlessly as prices drop.
4. Learn What You Can
If a crash sounds scary, it’s probably just because you don’t know much about the situation. This is a great time to educate yourself.
Read up on stock market history and expert analysis of the current situation. Try to look at the big picture, not just the momentary crisis.
5. Ask for Advice
If you’re still not sure what the best next move is, don’t hesitate to ask for advice before you decide.
Consider working with a financial advisor, at least briefly, to plan the next steps. This can help you get a second opinion before making rash decisions that will lock in your losses.
A U.S. Stock Market Crash: Not as Scary as You Think
As you might be able to see by now, with the right approach, a stock market crash can actually be a good thing. Follow these steps, and you won’t just weather the storm — you’ll benefit from it.
Want to learn more about getting the most from your portfolio? Don’t miss this guide to swing trading!