Markets
MCD

Worried About a Stock Market Crash? 4 Ways to Be Ready

Stocks are under pressure from inflation fears, and it may have you worried about an impending crash. Sadly, there's no investor crash helmet available to protect you from turbulent markets. But there are other ways to prepare for rough times ahead.

To be clear, I'm not predicting the market will crash this month or this year. I can freely admit I'm terrible at market forecasting. For that reason, I'm sharing four crash readiness strategies that don't involve selling out, taking short positions, or doing anything that'll backfire if a crash doesn't materialize.

1. Check your cash supply

A stock market crash stings most when you need to liquidate. Selling an asset at a loss is universally unpleasant. And the feeling is compounded if the market rebounds in short order and you're not positioned to benefit.

Person researching charts on phone and laptop.

Image source: Getty Images.

A healthy cash supply on hand is your first line of defense. If the market crashes and you lose your job the next day, hopefully your cash can keep you afloat until you replace your income. At a minimum, the cash will reduce your reliance on liquidations and buy you some time to participate in the market recovery.

Experts recommend having enough cash to cover three or more months of living expenses. If you don't have that amount today, you have tough choices to make. You can liquidate some of your portfolio now, knowing that you may miss gains if investors turn optimistic. You could sell a different asset. Or you could cut back your living expenses to the essentials temporarily and save to your cash fund.

2. Review your speculative positions

The small-caps and speculative plays in your portfolio often get hit the hardest in a crash. Some of this is an outcome of investor perception. When the market gets dicey, many investors will shift out of their speculative positions and into trusted, defensive names like Procter & Gamble (NYSE: PG) or McDonald's (NYSE: MCD). That trend naturally puts downward pressure on smaller company stocks.

Investors make this shift because smaller companies tend to struggle more in difficult business climates. They may not have the leadership experience and access to capital they need to manage seamlessly through revenue declines or rising expenses.

Review your portfolio and identify which positions present the most risk in a downturn. If they collectively account for more than 5% of your portfolio, consider lowering your exposure.

3. Rebalance

The S&P 500 (SNPINDEX: ^GSPC) has grown more than 41% in the last 12 months. If you haven't rebalanced your portfolio lately, you are probably overweighted in stocks. That's not where you want to be heading into an uncertain market.

You should reevaluate your investment plan at this time, too. Rebalancing to an asset allocation that reflects your outlook from five years ago isn't terribly useful. You are older and possibly more risk-averse now versus even one year ago. Redefine your target asset mix based on your situation today, and then rebalance accordingly.

4. Look for opportunity

A stock market crash creates opportunity to buy good stocks at lower prices. For that reason, your readiness plan should include offensive moves as well as defensive ones. Start researching stocks you'd like to buy in a crash and make your wish list.

You'll likely find that focusing on the opportunity is a game-changer emotionally. Instead of waiting anxiously for your assets to lose value, you can anticipate how strong your portfolio will be on the other side. You might even feel a twang of disappointment if the market finds its footing and returns to growth.

Ready for anything

The market crashes sometimes, and there's no headgear to protect you. Accepting those facts as unavoidable is a big step in readying yourself for whatever happens next. If you are eager to take action too, add to your cash stores and then review and rebalance your portfolio.

You can also put some energy into window shopping for stocks. That way, if there is a crash, you'll be ready to take advantage.

10 stocks we like better than McDonalds
When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*

David and Tom just revealed what they believe are the ten best stocks for investors to buy right now... and McDonalds wasn't one of them! That's right -- they think these 10 stocks are even better buys.

See the 10 stocks

*Stock Advisor returns as of May 11, 2021

Catherine Brock owns shares of McDonalds and Procter & Gamble. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

In This Story

MCD PG

Latest Markets Videos

    The Motley Fool

    Founded in 1993 in Alexandria, VA., by brothers David and Tom Gardner, The Motley Fool is a multimedia financial-services company dedicated to building the world's greatest investment community. Reaching millions of people each month through its website, books, newspaper column, radio show, television appearances, and subscription newsletter services, The Motley Fool champions shareholder values and advocates tirelessly for the individual investor. The company's name was taken from Shakespeare, whose wise fools both instructed and amused, and could speak the truth to the king -- without getting their heads lopped off.

    Learn More