Key Points

• Rising inflation and increasing global debt are warnings signs
• Market is under the pandemic stress
• Cautious investment approach can avoid losses

Preparing for a stock market crash is a challenge that every investor eventually has to face. They can occur seemingly overnight. And therefore, it leaves investors little time to respond and protect their portfolios.

Every time a stock market crash occurs, the market reacts differently. The last stock market crash, which was driven by the pandemic, was characterized by a huge drop in a single day. On the other hand, the recovery was also rather quick. But in 2008, the recovery process took a lot longer.

Today I’ve spotted some warning signs that another crash could be on the doorstep. So, let’s take a look.

Warnings signs that can trigger a stock market crash

The rising inflation is a matter of concern. The U.S. inflation rate in February 2022 was 0.9%, pushing year-over-year inflation to 7.9%. This is the highest inflation rate recorded in 40 years. Secondly, global debt reached record high levels of $303trn last year.

It’s worth mentioning that the stock market experienced the worst weeks in reference to performance in January 2022. Moreover, with government spending on the rise, I believe the economic recovery is still a long road ahead. In my opinion, this, combined with an escalating geopolitical situation in Eastern Europe, could lead to a stock market crash.

What I’m doing now

The first step I will take is to avoid the market sentiment driven by short-term movements. The reason is that the short-term market sentiment misses out on the long-term valuation of the stocks. A poor investment can be a huge burden on my portfolio, especially during a stock market crash. Hence, my approach is not to be driven by emotions while handling my investments.

The second step, and a very important one, is to avoid the market play. Usually, investors follow this trick of investing in companies as their prices are falling in anticipation of full recovery later on. But 2022 is an exceptional year. The global economy is still under pandemic stress. Will the company’s stock recover? It is a question that is equally unanimous to the current economic situation.

Finally, the easiest and hassle-free way of avoiding any loss is to hold my investments. I am a big fan of value investing. Therefore, avoiding any action in case of a crash is the best way forward. Besides, good company stocks always rebound once the market recovers.

Final thoughts

The stock market is in a seesaw motion at the moment. What the next downward trend brings is totally unpredictable. In fact, when a downward pull of the stock market can dip towards a stock market crash, no one knows for sure.

The economy has its red flags, which have a significant impact on the stock market. Therefore, a stock market crash seems inevitable to me. But what can trigger the bearish trend towards further downfall, I can never know. Besides, one thing I know for sure. That is how to guard my money against the ripple effects of a market crash. I am positive if I follow the above-discussed strategies throughout the year, I can steer away from the losses in my portfolio.

Learn more about stock market crashes

• 3 reasons why a stock market crash is coming
• Stock market crash: I’m following Warren Buffett’s strategy and buying cheap UK shares
• How I’m preparing for a stock market crash in 2022
• 2 Warren Buffett strategies I’d use in the next stock market crash

Saima Naveed does not own shares in any of the companies mentioned. The Money Cog has no position in any of the companies mentioned at the time of writing. Views expressed on the companies and assets mentioned in this article are those of the writer and therefore may differ from the opinions of analysts in The Money Cog Premium services.