How to Protect and Grow Your Wealth in a Stock Market Crash

How to Protect and Grow Your Wealth in a Stock Market Crash

The stock market can be volatile, and small or large crashes could happen at any time. We saw this recently with the crash during the COVID-19 pandemic. It’s only natural to think about your investments and what you can do to protect yourself during times of volatility. Luckily, there are ways you can invest effectively during a market crash to guard your portfolio and set yourself up for future gains. You probably won’t avoid losses entirely, but you’ll definitely be in good shape to profit when the market rebounds.

Method 1 of 3:
Investment Opportunities

Image titled Protect and Grow Your Wealth in a Stock Market Crash Step 1
1
Invest in large, reliable companies that can weather the storm better. A market crash is generally not the time to buy risky startups—these often go bankrupt during recessions. Instead, go for the big, established, reliable companies. These have a lot of capital at their disposal and are most likely to survive the crash and recover after. They won’t grow especially fast, but they’ll weather the storm and protect your money during a market crash. [1] X Research source Big companies you’ve probably heard of include 3M, Coca-Cola, Aflac, Apple, and Microsoft. These companies will also see stock declines in a crash, but they’re most likely to recover. You can snatch up some cheap shares during the crash and enjoy the rebound later. Companies on the S&P index are almost always good bets. Check this index for strong companies to invest in.[2] X Research source
Image titled Protect and Grow Your Wealth in a Stock Market Crash Step 2
2
Buy into index funds to track market improvements. Index funds are mutual funds or ETFs that track a particular index, like the S&P 500. If you buy index funds during a crash while they’re cheaper, you’ll be able to enjoy the rebound when the market improves. This is a good way to diversify your portfolio, since you aren’t betting on a single company for your investment. [3] X Research source Some mutual funds have pretty high fees, so always look into that before buying. You don’t want high management fees draining your portfolio during a recession.
Image titled Protect and Grow Your Wealth in a Stock Market Crash Step 3
3
Go for consumer staples for stocks that will probably rise. Consumer staples are items that people need to buy, no matter how bad the economy is. People need food, medicine, cleaning supplies, and hygiene products all the same, so consumer staples companies tend to do much better during recessions. Add some of these to your portfolio while prices are down during a crash. [4] X Research source Some consumer staple giants include Proctor and Gamble, Johnson & Johnson, Walmart, and General Mills. There are also index funds that track the consumer staples industry.
Image titled Protect and Grow Your Wealth in a Stock Market Crash Step 4
4
Increase your dividend holdings for steady cash flow. Dividends are payouts that companies pay to their shareholders, usually on a monthly or quarterly basis. The more shares you hold, the more of a payout you’ll get. This is a good way to bring in some money consistently during a crash or recession. [5] X Research source When considering a dividend stock, look at the company’s history of paying dividends consistently over the last few years. Steady or rising payouts are a good thing, while declines are a bad sign that they’ll continue paying during a recession. You can also buy index funds that specialize in paying dividends. Keep in mind that a dividend payout can be too high to remain stable. For example, dividend payments above 15-20% are probably not sustainable, and the company could go under during a recession.[6] X Research source
Image titled Protect and Grow Your Wealth in a Stock Market Crash Step 5
5
Continue making your normal retirement contributions. If you make regular contributions to a 401k or IRA account, then there’s no reason to stop because of the market crash. In fact, continuing your contributions is a good move because prices are cheaper. Continue on your normal contribution schedule to keep saving for your future. [7] X Research source If you make enough money and have your expenses taken care of, you might even want to increase your contributions a bit during a recession to take advantage of lower prices. Advisers recommend only touching your retirement savings early if there’s an emergency, like illness or job loss. If you can avoid it at all, don’t touch your retirement fund unless you have no other choice.[8] X Research source
Image titled Protect and Grow Your Wealth in a Stock Market Crash Step 6
6
Short sell stocks that you expect to fall for a high-risk maneuver. Short-selling is a complicated stock transaction where you actually profit if the price falls instead of rising. You would borrow a security at a set price, sell it on the market, and then buy it back before you have to return it. You would be betting that the price has fallen, meaning that you’d buy it back at a lower price than you sold it at and keeping the profit. This is tough to pull off, but it could work in a market crash when prices are falling. [9] X Research source Keep in mind that this is a very complicated and risky move, and even professional investors caution against it. Unless you really know what you’re doing, avoid short-selling. The flipside of short-selling is that you’ll lose money if prices rise, and unlike owning stock shares that fall and then recover, you can’t make your money back. This is why it’s so risky.
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Method 2 of 3:
Investment Protection

Image titled Protect and Grow Your Wealth in a Stock Market Crash Step 7
1
Avoid panic-selling so you don’t miss out on a market improvement. It’s very tempting to lose your nerve and sell your holdings during a market crash, usually taking a loss. Resist this urge! Market crashes are historically followed by long periods of growth and profit. If you sell everything, your losses are permanent, but if you hold on to your shares until the market recovers, you’ll be able to regain your money. You’ll have to accept losses in your portfolio for now, but it’ll be worth it when the market recovers. [10] X Research source An acceptable reason to sell during a crash is if you don’t have enough money to cover your expenses. In the future, try to build up more of an emergency fund so you don’t have to tap into your investments. If you want evidence of this, look at the historical stock market data for a few years following major crashes, like 1929, 1987, 2001, and 2008. You'll see that following all of these crashes, there was sustained growth.
Image titled Protect and Grow Your Wealth in a Stock Market Crash Step 8
2
Eliminate as many fees from your portfolio as you can. A market crash is no time to have manager or fund fees draining money from your portfolio. Some accounts and mutual funds have pretty high fees, so this could be hurting your bottom line. This is a good time to review your portfolio and transfer your funds into investments with lower fees. [11] X Research source Even a small difference in fees could mean a huge dollar amount. The difference between 0.1% and 0.5% per year might not seem high, but if there’s $100,000 in your account, that’s $100 per year vs. $500 a year. Over 10 years, you’d be paying $1,000 vs. $5,000. In general, ETFs have lower fees than mutual funds.
Image titled Protect and Grow Your Wealth in a Stock Market Crash Step 9
3
Reinvest your dividends to snatch up more cheap shares. If you invest in dividend stocks, you have an option to transfer the dividends to your bank or reinvent them in the company. If you don’t already do so, it pays to reinvest your dividends during a market crash. This way, you’ll be getting more shares while prices are low and ensuring better gains in the future. [12] X Research source Your brokerage account probably has an option to reinvest your dividends, either from individual companies or for your whole portfolio. If you work with a broker, you can just tell them you want to reinvest your dividends.
Image titled Protect and Grow Your Wealth in a Stock Market Crash Step 10
4
Reduce the risk level on your portfolio if you can’t take the losses. If you have a managed account or robo adviser, then your investments are regulated by an algorithm following your risk tolerance. If you’re not liking the losses you’re seeing in your portfolio, then you can lower that risk tolerance. Your portfolio will then rebalance to less risky investments that will remain more stable during the downturn. [13] X Research source Keep in mind that lowering your risk tolerance will also lower your returns later on when the market recovers.
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Method 3 of 3:
Risk Management

Image titled Protect and Grow Your Wealth in a Stock Market Crash Step 11
1
Build up your emergency savings before you invest too much. While you might want to try and make money in the stock market while prices are low, make sure you can take care of all your bills first. Putting all of your money in stocks could leave you without enough money for your living expenses, especially if the market is falling. Build up an emergency fund of 3-6 months of expenses before investing. This way, if you lose your job or encounter an emergency, you’ll be able to take care of yourself without worrying. [14] X Research source Having enough cash on hand also protects your investments because you won’t have to sell at a loss to cover your bills. You can still make some interest with your emergency savings. Look for a high-yield savings or money market account with a better interest rate to get some growth.
Image titled Protect and Grow Your Wealth in a Stock Market Crash Step 12
2
Remind yourself that the market will likely recover in the future. It’s tough to stomach a falling portfolio, even if you made good investments. In times like this, it helps to remind yourself that investing is a long-term strategy. Especially if you’re young and many years away from retirement, you have a long time to recover from the crash. This sort of long-term thinking can help you avoid panicking. [15] X Research source The historical data of the stock market shows that it always recovers and thrives after a crash. It’ll hurt to see your portfolio falling now, but in a few years you’ll feel much better. A common trick is looking up the stock market’s historical data starting on the day you were born. You’ll probably see that the market has grown significantly since then, which can help you feel better about the future.
Image titled Protect and Grow Your Wealth in a Stock Market Crash Step 13
3
Stick with fixed contributions to protect yourself from volatility. Putting all your money into the market at one time is a big risk during a crash. If you get in at a bad time, you’ll experience more losses than if you spread those contributions out over time. Develop a fixed contribution schedule and stick to it so you spread the risk out. [16] X Research source For example, if you put $1,000 into the market on a day when it drops by 3%, you’ll take a nasty loss. On the other hand, if you contribute $100 per week over a longer period, no single loss will hurt that bad.
Image titled Protect and Grow Your Wealth in a Stock Market Crash Step 14
4
Avoid investing money that you’ll need in less than 5 years. During market crashes and recessions, you really can’t bet that your portfolio will be higher in the near future, even after a few years. Recessions are volatile times. It’s best to keep any money you’ll need in less than 5 years in a savings account where you can reach it easily. Then invest the money you don’t need in the market. [17] X Research source You might be saving to buy a house within 3 years. It would be a bad idea to put your house savings into the market. Something more secure, like a high-yield CD, is a better option.
Image titled Protect and Grow Your Wealth in a Stock Market Crash Step 15
5
Embrace the volatile nature of the market and don't try to time it. No matter how much financial news you read and how many analysts you listen to, there’s simply no way to accurately time the market. Especially during a volatile time, you can’t reliably say when the market has bottomed out, will drop further, or will rise. Even professionals mess this up. It’s best to stay the course and stick with consistent contributions instead of trying to time the market. [18] X Research source You’ve probably heard stories about people who bought the right company at the right time and became millionaires. A lot of this is down to luck, and there are many more stories of people taking huge losses trying to time the market correctly. If you do want to try market timing, don’t invest too much money into it. That way, taking a loss won’t sink you.
Advertisement

Method 1 of 3:
Investment Opportunities

Image titled Protect and Grow Your Wealth in a Stock Market Crash Step 1
1
Invest in large, reliable companies that can weather the storm better. A market crash is generally not the time to buy risky startups—these often go bankrupt during recessions. Instead, go for the big, established, reliable companies. These have a lot of capital at their disposal and are most likely to survive the crash and recover after. They won’t grow especially fast, but they’ll weather the storm and protect your money during a market crash. [1] X Research source Big companies you’ve probably heard of include 3M, Coca-Cola, Aflac, Apple, and Microsoft. These companies will also see stock declines in a crash, but they’re most likely to recover. You can snatch up some cheap shares during the crash and enjoy the rebound later. Companies on the S&P index are almost always good bets. Check this index for strong companies to invest in.[2] X Research source
Image titled Protect and Grow Your Wealth in a Stock Market Crash Step 2
2
Buy into index funds to track market improvements. Index funds are mutual funds or ETFs that track a particular index, like the S&P 500. If you buy index funds during a crash while they’re cheaper, you’ll be able to enjoy the rebound when the market improves. This is a good way to diversify your portfolio, since you aren’t betting on a single company for your investment. [3] X Research source Some mutual funds have pretty high fees, so always look into that before buying. You don’t want high management fees draining your portfolio during a recession.
Image titled Protect and Grow Your Wealth in a Stock Market Crash Step 3
3
Go for consumer staples for stocks that will probably rise. Consumer staples are items that people need to buy, no matter how bad the economy is. People need food, medicine, cleaning supplies, and hygiene products all the same, so consumer staples companies tend to do much better during recessions. Add some of these to your portfolio while prices are down during a crash. [4] X Research source Some consumer staple giants include Proctor and Gamble, Johnson & Johnson, Walmart, and General Mills. There are also index funds that track the consumer staples industry.
Image titled Protect and Grow Your Wealth in a Stock Market Crash Step 4
4
Increase your dividend holdings for steady cash flow. Dividends are payouts that companies pay to their shareholders, usually on a monthly or quarterly basis. The more shares you hold, the more of a payout you’ll get. This is a good way to bring in some money consistently during a crash or recession. [5] X Research source When considering a dividend stock, look at the company’s history of paying dividends consistently over the last few years. Steady or rising payouts are a good thing, while declines are a bad sign that they’ll continue paying during a recession. You can also buy index funds that specialize in paying dividends. Keep in mind that a dividend payout can be too high to remain stable. For example, dividend payments above 15-20% are probably not sustainable, and the company could go under during a recession.[6] X Research source
Image titled Protect and Grow Your Wealth in a Stock Market Crash Step 5
5
Continue making your normal retirement contributions. If you make regular contributions to a 401k or IRA account, then there’s no reason to stop because of the market crash. In fact, continuing your contributions is a good move because prices are cheaper. Continue on your normal contribution schedule to keep saving for your future. [7] X Research source If you make enough money and have your expenses taken care of, you might even want to increase your contributions a bit during a recession to take advantage of lower prices. Advisers recommend only touching your retirement savings early if there’s an emergency, like illness or job loss. If you can avoid it at all, don’t touch your retirement fund unless you have no other choice.[8] X Research source
Image titled Protect and Grow Your Wealth in a Stock Market Crash Step 6
6
Short sell stocks that you expect to fall for a high-risk maneuver. Short-selling is a complicated stock transaction where you actually profit if the price falls instead of rising. You would borrow a security at a set price, sell it on the market, and then buy it back before you have to return it. You would be betting that the price has fallen, meaning that you’d buy it back at a lower price than you sold it at and keeping the profit. This is tough to pull off, but it could work in a market crash when prices are falling. [9] X Research source Keep in mind that this is a very complicated and risky move, and even professional investors caution against it. Unless you really know what you’re doing, avoid short-selling. The flipside of short-selling is that you’ll lose money if prices rise, and unlike owning stock shares that fall and then recover, you can’t make your money back. This is why it’s so risky.
Advertisement

Method 2 of 3:
Investment Protection

Image titled Protect and Grow Your Wealth in a Stock Market Crash Step 7
1
Avoid panic-selling so you don’t miss out on a market improvement. It’s very tempting to lose your nerve and sell your holdings during a market crash, usually taking a loss. Resist this urge! Market crashes are historically followed by long periods of growth and profit. If you sell everything, your losses are permanent, but if you hold on to your shares until the market recovers, you’ll be able to regain your money. You’ll have to accept losses in your portfolio for now, but it’ll be worth it when the market recovers. [10] X Research source An acceptable reason to sell during a crash is if you don’t have enough money to cover your expenses. In the future, try to build up more of an emergency fund so you don’t have to tap into your investments. If you want evidence of this, look at the historical stock market data for a few years following major crashes, like 1929, 1987, 2001, and 2008. You'll see that following all of these crashes, there was sustained growth.
Image titled Protect and Grow Your Wealth in a Stock Market Crash Step 8
2
Eliminate as many fees from your portfolio as you can. A market crash is no time to have manager or fund fees draining money from your portfolio. Some accounts and mutual funds have pretty high fees, so this could be hurting your bottom line. This is a good time to review your portfolio and transfer your funds into investments with lower fees. [11] X Research source Even a small difference in fees could mean a huge dollar amount. The difference between 0.1% and 0.5% per year might not seem high, but if there’s $100,000 in your account, that’s $100 per year vs. $500 a year. Over 10 years, you’d be paying $1,000 vs. $5,000. In general, ETFs have lower fees than mutual funds.
Image titled Protect and Grow Your Wealth in a Stock Market Crash Step 9
3
Reinvest your dividends to snatch up more cheap shares. If you invest in dividend stocks, you have an option to transfer the dividends to your bank or reinvent them in the company. If you don’t already do so, it pays to reinvest your dividends during a market crash. This way, you’ll be getting more shares while prices are low and ensuring better gains in the future. [12] X Research source Your brokerage account probably has an option to reinvest your dividends, either from individual companies or for your whole portfolio. If you work with a broker, you can just tell them you want to reinvest your dividends.
Image titled Protect and Grow Your Wealth in a Stock Market Crash Step 10
4
Reduce the risk level on your portfolio if you can’t take the losses. If you have a managed account or robo adviser, then your investments are regulated by an algorithm following your risk tolerance. If you’re not liking the losses you’re seeing in your portfolio, then you can lower that risk tolerance. Your portfolio will then rebalance to less risky investments that will remain more stable during the downturn. [13] X Research source Keep in mind that lowering your risk tolerance will also lower your returns later on when the market recovers.
Advertisement

Method 3 of 3:
Risk Management

Image titled Protect and Grow Your Wealth in a Stock Market Crash Step 11
1
Build up your emergency savings before you invest too much. While you might want to try and make money in the stock market while prices are low, make sure you can take care of all your bills first. Putting all of your money in stocks could leave you without enough money for your living expenses, especially if the market is falling. Build up an emergency fund of 3-6 months of expenses before investing. This way, if you lose your job or encounter an emergency, you’ll be able to take care of yourself without worrying. [14] X Research source Having enough cash on hand also protects your investments because you won’t have to sell at a loss to cover your bills. You can still make some interest with your emergency savings. Look for a high-yield savings or money market account with a better interest rate to get some growth.
Image titled Protect and Grow Your Wealth in a Stock Market Crash Step 12
2
Remind yourself that the market will likely recover in the future. It’s tough to stomach a falling portfolio, even if you made good investments. In times like this, it helps to remind yourself that investing is a long-term strategy. Especially if you’re young and many years away from retirement, you have a long time to recover from the crash. This sort of long-term thinking can help you avoid panicking. [15] X Research source The historical data of the stock market shows that it always recovers and thrives after a crash. It’ll hurt to see your portfolio falling now, but in a few years you’ll feel much better. A common trick is looking up the stock market’s historical data starting on the day you were born. You’ll probably see that the market has grown significantly since then, which can help you feel better about the future.
Image titled Protect and Grow Your Wealth in a Stock Market Crash Step 13
3
Stick with fixed contributions to protect yourself from volatility. Putting all your money into the market at one time is a big risk during a crash. If you get in at a bad time, you’ll experience more losses than if you spread those contributions out over time. Develop a fixed contribution schedule and stick to it so you spread the risk out. [16] X Research source For example, if you put $1,000 into the market on a day when it drops by 3%, you’ll take a nasty loss. On the other hand, if you contribute $100 per week over a longer period, no single loss will hurt that bad.
Image titled Protect and Grow Your Wealth in a Stock Market Crash Step 14
4
Avoid investing money that you’ll need in less than 5 years. During market crashes and recessions, you really can’t bet that your portfolio will be higher in the near future, even after a few years. Recessions are volatile times. It’s best to keep any money you’ll need in less than 5 years in a savings account where you can reach it easily. Then invest the money you don’t need in the market. [17] X Research source You might be saving to buy a house within 3 years. It would be a bad idea to put your house savings into the market. Something more secure, like a high-yield CD, is a better option.
Image titled Protect and Grow Your Wealth in a Stock Market Crash Step 15
5
Embrace the volatile nature of the market and don't try to time it. No matter how much financial news you read and how many analysts you listen to, there’s simply no way to accurately time the market. Especially during a volatile time, you can’t reliably say when the market has bottomed out, will drop further, or will rise. Even professionals mess this up. It’s best to stay the course and stick with consistent contributions instead of trying to time the market. [18] X Research source You’ve probably heard stories about people who bought the right company at the right time and became millionaires. A lot of this is down to luck, and there are many more stories of people taking huge losses trying to time the market correctly. If you do want to try market timing, don’t invest too much money into it. That way, taking a loss won’t sink you.
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