A market crash or bear market had been a common event in the stock market cycle. For 8 consecutive years, the market has continued to flourish and is currently in its all-time highs. A lot if investors are already being pessimistic about a possible market crash. Nobody can predict the market, but it pays well to prepare for any forthcoming crash. Follow these 8 ways in order to hedge yourself from a possible market crash.
Read more about understanding the concept of bear and bull markets.
Ways to survive a market crash
Invest only what you can afford to lose – A market crash can cause a huge impact in the economy. You can expect prices of goods, fuel, and even utilities to rise. Make sure to allocate your money wisely. Take out short-term funds from your investment funds and prepare yourself for a whole year, or several years, of possible economic downturn.
Buy and hold strategy – Based on historical data, most investors who get out of a crash unscathed were the ones who held for a long-term. Investors with a broader time horizon – 10 years and more- are more capable to ride out a market crash than those who invest only for a short period of time. Do not just hit the panic button during a crash and sell out all your investments, instead, stay calm and keep your investments in check. Chances are, the market would be able to snap back again as it has done for years before.
Buy low strategy – A market crash doesn’t necessarily mean a bad thing. Some investors use this as an opportunity to enter the market, especially during these times that the market exceeded its previous price peaks. Choose your stocks wisely and enter the market with a discount. Make sure not to just invest blindly. Not all stocks are able to recover after a market crash.
Dollar cost averaging – Another common strategy is DCA or Dollar Cost Averaging. This refers to the process of regularly investing in stocks with a preset amount regardless of the price. Through this technique, you can invest more when stocks are cheap and invest less when the prices are high. Studies have shown that investors who opted for DCA came out profitable despite a market crash.
Diversify your portfolio – This step cannot be stressed enough. Diversifying your portfolio hedges you against risk, not only during a market crash, but even during price corrections. Specifically, during a market crash, it would be wiser to invest in international stocks and other assets rather than just focusing on stocks.
Practice value investing – Invest in value stocks during a market crash. These stocks usually ride the current market trend. This could give you the opportunity of buying them at a lower price and then be able to ride with the rising trend once the market recovers again. Make sure to screen your stocks thoroughly because these require in-depth knowledge about the stocks and companies before they could become value stocks.
Invest in defensive stocks – As mentioned in a previous article, defensive stocks are assets that are considered as basic necessities. These stocks rarely go down with a market downturn. Most of them even increase in value during these times. Investing in defensive stocks can help you stay profitable regardless of the current market condition.
Invest in precious metals – Another type of asset that usually stays strong during a market crash is precious metals. These metals are very stable, showing little to no movement even through an overall market fall. A lot of investors allocate their investments in precious metals during these times, as it has been a proven method to hedge against a huge market disaster.
A market crash is inevitable. The only way you can hedge yourself from this impending disaster is to face it with enough preparation. Follow the tips listed above and safeguard your investments from a market downturn.
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