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How to Prepare for a Market Downturn

We all know a recession is coming. Here's how to prepare for a market downturn when it comes to stock portfolios.

By Ossiana TepfenhartPublished 6 years ago 5 min read

If you listen to the major news headlines today, a lot of the policies that are being enacted by lawmakers are pretty bad indicators as far as market health. Quite a few people believe that we are headed towards a really ugly recession or depression.

Even if we aren't really going to see a market drop, the truth is that learning how to prepare yourself for market turmoil is a really wise choice. It's better to be safe than sorry—and that's why experts strongly suggest taking these steps to prepare for a market downturn.

Have an emergency savings account with as much money as possible in it.

The first step you need to take in order to prepare for a market downturn is to build a safety net of cash—and make sure you won't end up starving in the event of a job loss.

Assuming that you are working, it's a wise idea to stash up as much as six to eight months' of savings in order to weather a sudden round of lay-offs. Since getting work is much harder when it's a bad economy, that emergency fund should be as padded as possible.

You also need to keep your fears in check.

It doesn't make sense to sell all your stocks on the market, just because some influencer said things will get gloomy. Doing this means you will miss out when the market bounces back, and also puts you on the hook for a bunch of taxes.

Obviously, if you see a stock that looks like it's about to go belly-up, you might want to sell. However, that should always be the case and that's why stop-loss selling is a popular technique.

This can be hard to do, particularly if you are an emotional investor. Sometimes, the best way to mentally prepare for a market downturn is to turn off the TV.

Dollar Cost Averaging is the idea of buying a fixed dollar amount of shares on a regular basis regardless of how much the stock costs. The idea behind this is that regularly buying during a downturn will pay off larger, since most stocks end up climbing back up.

One of the best apps to start investing in the stock market during a bear season is Stash. The reason why is because it basically relies on DCA to help lower costs and maximize return over the long-term run.

Getting a headstart on DCA is one of the easiest ways to prepare for a market downturn while also maximizing your investments. This is why it's one of the safest stock market strategies out there.

Use common sense.

Whether it's during a bull or a bear market, you still need to use common sense when investing. Even though this is common knowledge, common sense is way more vital during times of economic turmoil.

This is because bad times tend to bring out far more scams and bad business tactics. This, in turn, results in bad outcomes for investors who are overly trusting or downright foolhardy in their investing.

High-risk investments are not a good option right now. Short-term investments will be even riskier now.

If you are about to face an economic downturn, don't invest in the most dangerous investments you can find in hopes that it will pay off. Your best bet would be to prepare for a market downturn in a more conservative way.

Be prepared to play dead in a bear market.

The old adage says that if you end up meeting a bear out in the forest, you should play dead. The bear won't harm you if you look harmless. When it comes to the stock market, this means that you shouldn't try to "fight" the downturn by selling stocks and acting loopy.

Playing dead means making a calm, collected switch to investing in bonds, CDs, and other "slow but sure" forms of investments during this time. Almost any low-risk investments you'll find will be a better option during a bear market.

Don't invest money you really can't afford to lose.

The jury seems to be divided on how to prepare for a market downturn. Some claim that the easiest way to make sure you're ready is to avoid investing at all costs. This isn't necessarily wise.

Others claim that you should wait until the market plunges and snap up as many shares as you can. This is a bad move, too, because buying willy-nilly is never a good idea. Most will just tell you not to put money down that you can't afford to lose.

Bear markets mean that there is a higher chance of losing your investment as a whole. You shouldn't invest if you can't afford to. You also shouldn't invest money that you will need to make ends meet.

You can also prepare for a market downturn by waiting for your favorite stocks to decrease in value—and then buying them up.

Waiting until the bear market starts is one of the easiest ways to ensure that you can get a good price for great stocks. This is called "value investing," and it's one of Warren Buffett's favorite investment strategies. You can copy his strategy and win big.

The idea behind this is that you will need to stay and wait until the market ends up healing. If you're patient, this can be a great way to win big during the most bearish of times.

Start looking into stocks from companies that manufacture necessities.

The easiest way to prepare for a market downturn is to switch your investment strategy up by focusing on companies that make things people need in order to survive.

Everyone needs the internet, and most also will need a phone. Everyone needs food, water, toothpaste, and gas. Everyone also needs medicine and banking, too.

Stocks that are from companies that produce these things are called 'defensive stocks,' and typically retain their value during times of an economic downturn. Therefore, it's a good idea to invest in them prior to a crash.

Consider getting a side hustle started.

In terms of padding your safety net and keeping yourself financially fit, the best way to ensure you won't be in trouble once the recession hits is to start a side hustle. In fact, it's one of the smartest things you can do at any time.

A side job can help you cushion the blow of sudden unemployment, and also give you extra cash for savings. Even starting a new business can improve the way you enjoy life during a bearish market. You might even end up replacing your full-time job with it if you are lucky.

Buy up Inverse ETFs.

Most ETFs go up when the markets go up—but not these! Inverse ETF increase in value when the market goes down. For investors who want to make a huge profit during stock market crashes, an Inverse ETF is your best bet.

These ETFs tend to do best when markets are in very serious turmoil. If you want to prepare for a market downturn you are worried will turn into a crash, this is a wise way to do it.


About the Creator

Ossiana Tepfenhart

Ossiana Tepfenhart is a writer based out of New Jersey. This is her work account. She loves gifts and tips, so if you like something, tip her!

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