I’m by no means forecasting a stock market crash, but I appreciate that these things can happen. Sometimes we’re not ready for it, and sometimes we can’t see it coming.
Nonetheless I’m aware that there are a few things, including several geopolitical factors, that could tip global stocks into a deep decline. These include:
- An escalation of the Israel-Hamas conflict
- A further escalation of Russia’s war in Ukraine
- An invasion of Taiwan by Chinese forces
- Additional monetary tightening, causing a contraction in economic activity (a ‘hard landing’)
- Extra cold winter in the northern hemisphere leading to surging gas and fuel prices
With this in mind, it’s always useful to have made preparations, just in case we do see a stock market crash. So, here are three ways to prepare.
Diversification
Diversification involves spreading my investments across various asset classes, such as stocks, bonds, real estate, and even alternative investments like commodities. It’s essentially the practice of not putting all my eggs in a single basket.
Why would I want to do this? Well, when the market crashes, it’s not always even. Some asset classes will be hit worse than others. The same goes for stocks. For example, Ocado, Moderna, and energy firm EQT are among the stocks that actually surged during the Covid-induced stock market crash.
Diversifying can help reduce risk because different assets may respond differently to market conditions. If one asset class suffers during a crash, others may provide stability.
Holding cash
This strategy essentially involves selling some of my stocks or other assets and converting them into cash or cash-equivalents like money market funds or short-term bonds.
It’s a conservative approach that aims to safeguard my hard-earned money during turbulent market times.
The primary reason I find moving to cash appealing is the reduction in risk. Cash is one of the most stable and liquid assets, providing a secure haven for my capital.
By moving to cash before or during a market crash, I can shield myself from potential losses that often accompany such downturns.
It’s like building a financial fortress to weather the storm, giving me peace of mind knowing that a portion of my investments is protected.
Stop-loss orders
A stop-loss order is like an insurance policy for my investments. I can preset a specific price point at which I want to sell a stock.
If the stock’s price drops to that level, the order automatically executes, helping me avoid further losses. It’s akin to having a predetermined exit plan that kicks in when things take a turn for the worse.
While it’s important to understand that stop-loss orders aren’t foolproof and may not provide absolute protection in all market conditions, they are a valuable tool to limit the extent of my losses.
By employing stop-loss orders, I can sleep a bit easier at night, knowing that I have a level of protection in place in case the market experiences a sudden downturn.
