The stock market experienced a record run last year. O S&P 500 it has increased by almost 70% since the market crash in mid-March 2020, and it has been a crazy trip for investors.
However, there is a chance that the stock market is heading for another correction. Some investors fear that this upward trend may not continue much longer and that the stock market bubble will burst soon. When that happens, stock prices may plummet and we may experience a complete market crash.
It is safe to say that the market will experience a slowdown – after all, stock prices cannot continue to rise forever. When exactly this will happen, no one knows, but it is a good idea to be ready no matter what. That is how I am preparing my finances for the inevitable crisis.
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1. I am keeping my emergency fund strong
Having a well-stocked emergency fund is always a good idea, but it is especially important during periods of stock market volatility. If you face an unexpected expense and do not have an emergency fund, you may have no option but to sell your investments to cover the costs.
However, when the market experiences a slowdown, stock prices fall. If you sell your investments when prices are lower, you could end up losing money.
In general, I plan to keep at least six months of savings in my emergency fund. That way, no matter what the market does, I don’t have to channel my investments to cover any unplanned costs.
2. I continue to invest consistently
It may be tempting to pause investments when the stock market is unstable. However, investing during market downturns can actually be an economic measure.
As stock prices are lower during market downturns, it can be a good opportunity to buy good stocks at bargain prices. Even if you are investing in mutual funds or ETFs, instead of individual stocks, you can still get more for your money during market crises.
Instead of waiting until the market recovers to continue buying shares, it is a good idea to continue investing as usual, regardless of what the market does. If the stock market bubble bursts and stock prices plummet, use this as an opportunity to accumulate quality stocks without breaking the bank.
3. I am maintaining a long-term view
Breaking in the stock market can be intimidating, but there is no reason to panic. Historically, the market has always recovered from each of its declines – and it is extremely likely that it will recover again if another crash is on the horizon.
^ SPX data by YCharts.
If you maintain a long-term perspective, it will be easier to avoid panic sales when stock prices start to fall. Remember that the market will eventually recover and you will be able to weather the storm.
The key to investing in the long term is to ensure that you are investing in quality stocks or funds. Healthy companies with solid business fundamentals will be able to survive a slowdown in the market, so their stock prices are expected to rebound. As long as you are putting your money into strong investments, you should be able to survive even the worst declines in the market.
As frightening as they may be, stock market slowdowns are quite normal. While no one knows exactly what the future holds for the market, it is safe to assume that stock prices will fall sooner or later. By preparing for it now, you will be ready for anything.