6 ways to prepare for a market crash

Every investor lives at the risk of a major economic collapse, no matter how far away. It has happened before. It can happen again. If so, years of hard-earned savings and retirement funds may be wiped out within a few hours.

Fortunately, there are steps you can take to protect most of your assets from market crashes and even global economic depression. Preparation and diversification are key elements of a sound defense strategy. Together, they can help you weather the financial turmoil.

Key points

  • Investors can take steps to protect most of their assets from market crashes or global economic depression-preparation and diversification are the key elements of a sound defense strategy.
  • Diversifying your investment portfolio may be the single most important measure you can take to protect your investment from serious market difficulties.
  • When there is real turbulence in the market, most professional traders will turn to cash or cash equivalents.
  • Keep at least a small part of your portfolio in a guaranteed investment that will not fall with the market.
  • Other smart tips to protect your investment portfolio from market crashes include hedging your bets by playing an option game; paying off debt to maintain a stable balance sheet, and using tax loss gains to mitigate your losses.

1. Diversity

Diversifying your investment portfolio may be the most important measure you can take to protect your investment from a severe bear market.

Depending on your age and risk tolerance, it may be reasonable to deposit most of your retirement savings in individual stocks, stock mutual funds, or exchange-traded funds (ETFs).

However, if you see a crisis looming, you need to be prepared to move at least a significant portion of your funds to a safer place.

Today, individuals can invest 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 some of them. You can even get involved in alternative assets, perhaps not interested in producing oil and gas projects.

Spreading your wealth into a few of these categories is the best way to ensure that you have something left when you really hit the bottom.

2. Fly to safety

Whenever there is a real turmoil in the market, most professional traders turn to cash or cash equivalents. If you can do this before the crash occurs, you might want to do the same thing.

If you exit quickly, you can come back when the price is much lower. Then, when the trend finally reverses, you can profit more from the appreciation.

3. Get a guarantee

You may not want to spend all your savings on guaranteed investments. They just didn’t get enough returns. But it is wise to keep at least a small part of things that will not fall with the market.

If you are a short-term investor, bank CDs and Treasury bonds are good choices.

If your investment time is longer, fixed or index annuities or even index universal life insurance products can provide better returns than treasury bonds. Corporate bonds and even preferred stocks of blue-chip companies can also provide competitive returns with minimal to medium risk.

4. Hedge your bets

If you see a major recession in the future, do not hesitate to be prepared to profit directly from it. There are several ways to do this, and the best method for you depends on your risk tolerance and time frame.

If you hold a stock that you think will fall, then you can short the stock and buy it back when the chart pattern shows that it may be close to the bottom.

This is easier to do when you already have stocks to be shorted. In this way, if the market is not good for you, you only need to deliver your stock to the broker and pay the difference in cash.

Another option is to buy put options on any stocks that you own that have options or one or more financial indexes. If the price of the underlying securities or benchmark falls, the value of these derivatives will increase substantially.

5. Pay off debts

If you have a lot of debt, if you see bad weather about to appear in the market, you’d better liquidate some or all of your assets and pay off the debt. This is especially wise if you have a lot of high-interest debts, such as credit card balances or other consumer loans. At least when the bear market is raging, your balance sheet will be relatively stable.

Paying off your house or at least a large mortgage is also a good idea. Minimizing monthly obligations is never a bad idea.

6. Find the silver tax lining

If you cannot directly protect your investment from collapse, you can still avoid losses in a variety of ways.

The tax loss harvest is an option that should correspond to the continuous loss in the tax account. You only need to sell all the losing positions and buy them back at least 31 days later. (This means selling before the end of the current tax year to realize a loss by January 1, and then buying back the stock 31 days or later if you want.). Prior to this, the repurchase of shares will be regarded as a “shuffle” by the IRS, and no loss can be claimed. )

You can then offset all losses against any gains you realize in these accounts. You can carry forward any excess losses to the next year and write off up to $3,000 in losses from your ordinary income each year.

Consider switching to a Roth account

If you have any traditional IRAs or other qualified retirement plans provided by your former employer that you can relocate, please consider converting some or all of them to Roth IRAs, as they are not of high value. This will effectively reduce the conversion amount, thereby reducing the taxable income you must declare.

For example, a 30% decrease in the value of a $90,000 IRA means that if you convert the entire balance within one year, you will not be taxed $27,000.

If you happen to be unemployed for some or all of the year, this strategy is a particularly good idea, because even if you switch, you may be in one of the lower tax brackets.

InvestingClue does not provide tax, investment or financial services and advice. The information provided does not take into account the investment objectives, risk tolerance or financial situation of any particular investor, and may not be suitable for all investors. Investment involves risks, including possible loss of principal. Investors should consider hiring financial professionals to determine appropriate retirement savings, taxation and investment strategies.


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