Every investor lives with the risk, no matter how remote, of a major economic meltdown. It has happened before. It can happen again. If it does, years of hard-earned savings and retirement funds could be wiped out in hours.
Fortunately, there are steps you can take to shield the bulk of your assets from a market crash or even a global economic depression. Preparation and diversification are the key elements of a sound defensive strategy. Together, they can help you weather a financial hurricane. Here are some of the ways you can protect yourself from a stock market crash:
- Diversify
Diversifying your portfolio is probably the single most important measure that you can take to shield your investments from a severe bear market.
Depending on your age and your risk tolerance, it may be reasonable for you to have most of your retirement savings in individual stocks, stock mutual funds, or exchange-traded funds (ETFs).
But you need to be prepared to move at least a good portion of that money into something safer if you see a crisis looming.
Individuals these days can put their money in a wide range of investments, each with its own level of risk: stocks, bonds, cash, real estate, derivatives, cash value life insurance, annuities, and precious metals are a few of them. You can even dabble in alternative holdings, perhaps with a small interest in a producing oil and gas project.
Spreading your wealth across several of these categories is the best way to ensure that you have something left if the bottom really falls out.
- Fly to safety
Whenever there is real turbulence in the markets, most professional traders move to cash or cash equivalents. You may want to do the same if you can do it before the crash comes.
If you get out quickly, you can get back in when prices are much lower. Then, when the trend eventually reverses, you can profit that much more from the appreciation.
- Get a guarantee
You probably don’t want all of your savings in guaranteed investments. They just don’t pay off well enough. But it’s wise to keep at least a small portion in something that isn’t going to fall with the markets.
If you are a short-term investor, bank CDs and Treasury securities are a good bet.
If you are investing for a longer time period, fixed or indexed annuities or even indexed universal life insurance products can provide better returns than Treasury bonds. Corporate bonds and even the preferred stocks of blue-chip companies can also provide competitive income with minimal to moderate risk.
- Pay off Debts
If you have substantial debts, you may be better off liquidating some or all of your holdings and paying off the debts if you see bad weather approaching in the markets. This is especially smart if you have a lot of high-interest debt such as credit card balances or other consumer loans. At least you’ll be left with a relatively stable balance sheet while the bear market roars.
Paying off your house or at least a good chunk of your mortgage also can be a good idea. Minimizing your monthly obligations is never a bad idea.