How I’m preparing for a stock market crash in 2022
Panic is a word synonymous with a stock market crash. When every investor is struggling to secure their nose-diving net portfolio, share prices become chaotic. During a crash, I believe selling my securities is not a wise move. In fact, it is the best time to buy since fantastic businesses can often end up being on discount, in my opinion. In my experience, high-quality companies almost always recover. And the lower price opens the door to multi-bagger returns.
The stock market has been continuously accelerating since its collapse in early 2020. Not only this, many companies are producing double-digit growth along with escalating stock price performance. However, fears are circulating that prices have become too high. And that another crash is coming. It’s exceptionally difficult to predict when one might strike. So, it’s worth being prepared. With that in mind, here’s what I’m doing to protect my portfolio.
Understanding my portfolio before a stock market crash
My first act towards preparing for a stock market crash would be analysing my portfolio. I want to make sure I’m aware of the biggest threats each of my businesses faces. By being informed, it’s much easier to discern which company’s are in danger rather than simply encountering a temporary speed bump. And it also helps me decide which stock’s I may want to increase my position in should the prices start falling drastically.
Since I play on the defensive side, my portfolio consists of less volatile stocks that generate passive income. Such a portfolio usually falls less during periods of poor performance and also does well when prices are going up. Therefore, I might avoid a good chunk of herd behaviour during a panic-driven market.
Double-check my emergency fund
Having a backup plan should be on the top of every investor’s mind, in my opinion, especially if the market shows signs of approaching a crash. Even if I only hold fantastic businesses, the last thing I want is to be forced to sell them at a lower price because I’ve run out of cash to live on.
Everyone has different financial needs, so the amount of cash saved as a reserve is entirely a personal decision. Personally, I make sure I have enough to cover bills and other recurring expenses for at least a year since stock market recoveries can take time.
Shift to cash before the stock market crash hits
Throughout the years, what I have learned from the market is that stocks fall rather quickly than they rise. And amidst a stock market crash, almost everything falls – even the businesses completely unaffected. Therefore, diversified portfolios spread across multiple sectors are still exposed to substantial, albeit temporary, losses.
One potential defence against this is shifting out of stocks and into cash before it all goes belly up. This not only reduces the risk of loss but also provides a pool of funds to buy back into the market at lower prices later on. Needless to say, this is quite tricky to accomplish. Pull out too soon, and lots of potential gains are missed out on. Wait too long, and prices may have already reached their lowest point.
Stock market crashes, while memorable, are quite rare. But they can still have devastating results. What’s comforting is that most of the losses are reversed for solid businesses over the long term. As I said before, predicting the next meltdown is near impossible. But by being prepared, I can protect my portfolio from a lot of pain.
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Views expressed on the companies, assets and strategies mentioned in this article are those of the writer and therefore may differ from the opinions of analysts in The Money Cog Premium services.