The stock market has its ups and downs. Ups happen when things go great, and stocks rise in value. Downs occur when things aren’t so great, and the value of stocks drops. These ups and downs are commonly referred to as market crashes. In an extremely volatile stock market as we’re currently experiencing, these crashes can come at a moment’s notice. It’s important to know what you can do to protect yourself in the event that a stock market crash comes your way. Here are 5 ways to protect yourself from a stock market crash so you don’t get left with nothing if it happens again.
Table Of Contents
Know the signs of a stock market crash
First and foremost, you have to know the signs of a stock market crash. This allows you to start taking action before it’s too late, and it gives you a better chance of recovering from the crash. Some of the signs to look out for include:
– An increase in volatility: The increase in volatility is what causes the stock market crash. This means that the ups and downs are much more extreme than usual.
– An increase in margin use: The uptick in margin use is a sign that investors are using more of their own money than they should. This is a sign of an impending crash.
– A decline in investor confidence: A decline in investor confidence is a sign that investors are less confident about their investments than ever before. This is another sign that a stock market crash is imminent.
– An increase in short-selling: When there’s an increase in short-selling, this also indicates that a stock market crash is close at hand. Short-selling occurs when investors sell shares that they don’t own yet on the assumption that the price will drop.
– An increase in volatility in other markets: As the stock market crash approaches, you’ll likely see an increase in volatility in other markets. This is because investors are pulling money out of those markets to invest in the stock market to protect themselves during the crash. This is another sign that the crash is coming.
Diversify your investments
While it’s true that you’re never going to be able to completely avoid a stock market crash, you can prepare yourself to not be affected by it. The best way to do this is to diversify your investments. In other words, have a good mix of investment types. If the stock market crashes, some of your investments will be impacted more than others. That’s why it’s important to have a good mix so that your portfolio is balanced. If you’re investing most of your money in stocks, you’re much more likely to be affected if there’s a stock market crash. If you have a good mix of stocks, bonds, real estate, and other investments, you’ll be better able to withstand the crash.
Check your assets for quality and value
Another way to protect yourself from a stock market crash is to check your assets for quality and value. If you own stocks or other assets that fall under the category of equities, it’s best to check that they’re in good quality. It’s best to avoid companies that are heavily indebted or that have questionable management teams. It’s also good to make sure that the stock prices are reasonable. If they’re priced too high, they could crash during a downturn. If they’re priced too low, they might not have the value they deserve. If you own assets that fall under the category of fixed-income, make sure that they have reasonable value. If they have a high value, they could be hard to sell in a hurry. If they have a low value, it could take a long time to earn a reasonable return on your investment.
Be cautious with leveraged instruments
Another way to protect yourself from a stock market crash is to be cautious with leveraged instruments. There are plenty of investment instruments that are leveraged. This means that they have a built-in risk where you can lose more than what you put in. This is obviously risky when the market is going up, but it’s even more risky when the market is going down. There are plenty of investments that are leveraged, but some of the most common include margin accounts, futures contracts, and options contracts. Always be cautious when you’re investing in leveraged instruments. It’s especially important to be careful when the stock market is going into a downturn.
Take care of yourself
Another way to protect yourself from a stock market crash is to take care of yourself. When you’re feeling stressed out, worried, or anxious, you’re more likely to make bad decisions. Make sure you’re practicing self-care so you can remain as calm and rational as possible during a crash. Take breaks throughout the day, practice meditation, make sure you get enough sleep, and eat healthy so you can remain in control. When the market crashes, it can be easy to start obsessing over it. It can be tempting to constantly check your investments, but this can be harmful to you. Take frequent breaks from checking the market so you can stay healthy.
A stock market crash is inevitable, and you can’t avoid it. However, you can protect yourself from one by knowing the signs of a crash and by diversifying your investments, checking your assets for quality and value, being cautious with leveraged instruments, and taking care of yourself. There’s no way to know when the next crash will happen, but your best bet is to be prepared for it.
If you found this article helpful, please subscribe to my newsletter by filling out the form below so you don’t miss out on any future posts. Also, if you have any article ideas in mind, feel free to leave a comment on a topic you would like covered in an upcoming post.