How to Prepare for Market Crashes: Essential Tips for Investors
We can't predict the markets or crashes. So, how do we prepare for something if we don't know when it will arrive? Like the Boy Scouts, we always strive to prepare ourselves.
Investing for Stability
We prepare by investing so our portfolio is likely to never fall enough to force us out of the markets.
Long-Term Outlook
Because we have a long-term positive outlook, we believe markets will always recover. This belief is based on the fact that they always have in the past. Surviving the downturn by keeping our strategy intact is like surviving a crash.
Steps to Prepare
But how do we do this? Follow these steps:
- Determine Your Risk: Find out how much of a downturn you can stomach.
- Construct Your Portfolio: Build a portfolio based on history that is unlikely to fall this much.
- Document Your Expectations: Write how you expect your portfolio to perform in a crash. Then, when the next crash comes, you can compare reality with your expectations.
Understanding Market Trends
Markets have risen over the long term every time. So, we want a portfolio we can handle during its dips and drops. This way, we can enjoy the gains that have always followed in the past.