A downturn in the market is coming. It is not a matter of if, but when.
How do I know?
Because they regularly happen.
The smaller, shorter-term downturns are called “corrections.” The larger, longer-term downturns are called “bear markets.” I cannot tell you which one will happen next, but there will come a time in the future when you will see the market and your investments’ value drop.
So how do you prepare for one of these market downturns? Here are six tips to consider:
- Have an emergency savings account. A severe market downturn can have a significant impact on various organizations. For-profit companies’ sales decrease—people are hold off on purchasing that new television. Non-profit organizations’ donations decrease—people tend not to give as much to their church. Unfortunately, some organizations have to lay off employees to avoid going under. And if you happen to be one of those employees, an emergency savings account will be a huge help.
- Pay down debt. Your creditors will continue to send you a bill during a market downturn. They are not concerned about the market’s effect on you. They are concerned about getting paid. Decreasing or eliminating your debt will provide more financial flexibility for you during a market downturn.
- Live within your means. If you live within your means, you will find yourself with less debts and less of a need to pull back on your lifestyle. The impact of a market downturn is typically less on those that live within their means compared to those that live beyond their means.
- Rebalance your investment portfolio. In a market downturn, your investment portfolio will probably lose money. This is normal. However, an appropriately balanced portfolio for your life stage can help limit your risk.
- Develop a long-term perspective. Those who have a long-term perspective on their investments understand that market fluctuations happen. Shorter-term or longer-term downturns don’t deter them. Their sights are set on the future. For them, market downturns are opportunities to buy investments “on sale.”
- Expect a downturn. I have used the words “will happen” and “normal” in this post. And for good reason. Market downturns are normal and will happen in the future. Remembering this can help you maintain a level head during these dips and help you avoid drastic and regretful decisions. Don’t get caught off guard with market downturns. Expect them.
A market downturn is coming.
And that is okay.
You can start preparing for it today.