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I’d take these 3 steps to get ready for another stock market crash

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The recent stock market crash may have been followed by rapidly-improving investor sentiment, but a number of risks continue to face the world economy. For example, geopolitical tensions in Europe and the US, as well as continued growth in the number of coronavirus cases, could cause investor sentiment to weaken in the coming months.

As such, investors may wish to hold some cash so they can take advantage of buying opportunities. Through identifying the most attractive stocks available today, as well as reassessing your portfolio holdings, you may be able to build a solid portfolio of stocks for the long term.

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Cash holdings

Having cash available to invest during a market crash can put any investor in an advantageous position. They may be better able to capitalise on low valuations that may prove to be temporary in nature.

As such, having some cash within your portfolio at the present time could be a shrewd move. As mentioned, a number of risks continue to face investors that could lead to a decline in stock prices. This could mean that avoiding being fully invested in shares provides the capacity to take advantage of buying opportunities, as well as peace of mind.

Clearly, holding cash for the long term is unlikely to produce desirable returns. However, having it on hand during periods of market volatility, and with the prospect of a second market crash on the horizon, may be a logical move.

Identifying attractive stocks ahead of a market crash

As was the case in the recent market crash, share prices can quickly rebound after a decline. This means long-term investors may only have a short window to take advantage of undervalued opportunities.

Therefore, identifying the stocks you’re positive about prior to a decline for the stock market could be a sound move. It may enable you to react more quickly to a fall in share prices, since you’re likely to know which companies in specific sectors may be worth buying when their prices include wide margins of safety.

Assessing your portfolio holdings

Similarly, assessing your portfolio holdings prior to a market crash could be a sound move. For many stocks, their outlooks have changed dramatically since the start of the year. As such, their investment appeal may have altered materially.

This could mean that now’s the right time to sell them in order to provide the opportunity to reinvest in stronger businesses should they trade at more attractive prices.

Of course, this doesn’t mean you should avoid a buy-and-hold strategy. Over time, the stock market is likely to recover from any future market crash. But by holding the most attractive stocks from a risk/reward standpoint, you can generate high returns in the long run.

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Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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