3 steps you can take to worry less about a stock market crash | Smart Change: Personal Finances

(Maurie Backman)

It’s fair to say that 2022 has been a crazy year for equity investors. The market spent much of the first quarter in correction territory before regaining ground in late March. But we don’t know what the next quarter has in store for us.

It is entirely possible that stock prices will fall again, even temporarily. But that’s not something that should keep you up at night. And if you want to reduce your stock market fears, here are some steps you can take.

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1. Maintain a strong emergency fund

There is a very simple way to avoid losing money during a stock market crash — don’t sell anything. If you offload investments when they’re down, you’ll lock in losses, while if you leave your portfolio intact, you can weather the downturns and come out unscathed.

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But what if you need the money when stocks are down? You can’t control when life throws a curveball at you – but you can prepare by building up your emergency savings.

If you make an effort to keep a good amount of cash in the bank, you’ll have cash reserves to tap into in a heartbeat. This, in turn, could prevent a scenario where you are forced to liquidate stocks during a stock market crash and lock in hard-to-recover losses.

2. Assemble a diversified investment mix

When stocks fall overall, your portfolio is likely to lose value regardless of the specific stocks you own. But one way to potentially minimize losses in a downturn is to maintain a diverse mix of stocks.

Now you can do it in different ways. First, you could aim to own 15 or more stocks across a range of market sectors. Or, you can buy broad market ETFs.

ETFs, or exchange traded funds, allow you to buy a whole bunch of different stocks with a single investment. The great thing about them is that they take the guesswork out of diversification because rather than focusing on targeting different market segments, you can just invest your money broadly. Some ETFs, in fact, actually give you access to the whole purseincluding large enterprises, medium-sized enterprises and small enterprises.

3. Plan to invest for the long term

The stock market has a long history of recovering from crashes and rewarding investors who stick with it. So if you’re planning on doing the latter, you shouldn’t have to worry if stock prices drop temporarily.

It’s especially beneficial to take a long-term approach to investing if you’re quite young and years away from retirement. As you get older, you might want to start moving away from stocks (without dumping them completely). But if you still have a few decades left in the job market, tell yourself that you will not exploit your portfolio until the end of your career. This attitude alone could relieve a lot of stress.

Stock market crashes are far from pleasant. They also happen from time to time. But knowing how to prepare for it and cope with it could save you a world of angst.

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