The movement of the stock market is cyclical in nature. It is just not possible for the market to continue trending only in one direction. To add to this, the movement of the equity market can also be quite volatile and unpredictable. And so, you never know when the next market crash is just round the corner. Under such a situation, it becomes extremely important for you to protect your investments from the aftereffects of a sell-off. If you’re looking for some information on how to avoid a stock market crash, you’ve come to the right place. Here are some tips to avoid a stock market crash.
Prepare yourself for a crash
One of the best strategies to prevent the stock market crash from affecting your investments is to be fully prepared beforehand. Some of the ways in which you can prepare yourself for a sell-off include diversifying your investment portfolio to minimize the impact of the crash and investing in low-risk options.
While these two steps may not be able to help you fully avoid the effect of the crash, it can, to a large extent, prevent your investment portfolio from significantly degrading in value. This way, you can safely ride out the storm without any lasting impact.
Watch for the signs
Stock market crashes rarely happen overnight. Most of the time, there are clear indicators of an impending crash. If you’re looking for ideas about how to avoid a stock market crash, all that you need to do is carefully look out for the signs. The immediate signs of an upcoming huge market sell-off are almost always geopolitical and disease outbreak related.
Whenever you get wind of brimming geopolitical tensions or disease outbreaks, always make sure to exit the market early. By selling off your holdings on the market, you can not only realize some profits, but also protect yourself from the inevitable downside. The current economic scenario of the country and of the world is another major sign. A failing or a receding economy will always lead to a market sell-off sooner or later.
Set stop loss targets
This is arguably one of the easiest tips to avoid a stock market crash. Stop loss is an effective tool that can help limit your losses when your investment decisions don’t go according to plan. Basically, it ensures that your losses don’t go below a certain level.
Whenever you buy the stock of a company, always ensure to set a stop loss target immediately. This will allow you to reduce your capital loss in the event of a downslide in the stock price as a result of a market crash. Here’s a point to note. While there’s no perfect stop loss, it would be a good idea to set the target for your investment below 10% to 15% of your purchase price.
Invest in defensive stocks
Also known as non-cyclical stocks, defensive stocks are generally well established companies that are involved in the manufacture of essential consumer goods and services. Since these companies produce goods or render services that are almost always in demand, they tend to be profitable and financially sound even during economic hardships.
Defensive stocks are typically considered to be safe bets and are the least affected during a market crash. Their valuations don’t take a major hit even when the market is under a deep sell-off mode. So, investing in defensive stocks is one of the most popular strategies to prevent the stock market crash from affecting your investment portfolio.
Don’t rely too much on the market
The single best way to avoid a stock market crash is to limit participation during uncertain times. What this effectively means is that when you anticipate a market sell-off, it is best not to initiate any new positions, whether long or short.
Sometimes, staying away and monitoring the situation from afar is a much better option than trying to initiate any new investment decisions or strategies. This way, the chances of you getting affected by the stock market crash gets reduced to zero. And once the dust has settled, you can enter the market and utilize a buy and hold strategy for some gains.
If you do get stuck, remember that the stock markets are cyclical in nature and don’t worry, because a recovery is likely. You can also make use of the opportunity that a market crash brings in and buy low, so you can earn decent returns when the markets recover. With these pointers in mind, it becomes relatively easier for you to cushion yourself from the adverse impact of a market crash.