How to Shield Yourself from a Stock Market Crash?

How to Shield Yourself from a Stock Market Crash

Nowadays, there is a tremendous rise in the number of people opening their Demat accounts to buy stocks.

With the rising number of people, having the ambition to grow their money over time also arises numerous risks.

We know that during the year 2021, we witnessed a bull run where many stocks went up by 100—1000%.

Many people made a lot of money during this bull run, which attracted many youngsters to try their hands in the equity market.

There is an old saying that every good thing has to end someday, just like that the bull run will also end eventually.

It is normal for stocks to increase and decrease in price from time to time; however, a sudden, dramatic decline in price is not normal.

This can be a potential market crash. Some people will name it as a market correction as well. We can’t avoid the market crash, but we can prepare a shield for our portfolio from the stock market crash today.

What is a Market Crash?

All of us have heard people talking about the stock market and saying, will the stock market crash today.

After the bull run, everyone is talking about the stock market crash in India.

Well, what exactly is a market crash? An equity market crash is the rapid decline of stock prices over a short period of time.

The crash can happen because of multiple factors like panic selling, any bad news that drives people to fear, and several other macroeconomic factors.

The question that will stock market crash today is often mixed up with the rise of a bear market. We need to know that market crashes and bear markets are not the same.

A bear market is a period where the stock market price decreases over a longer period of time, such as a few months or years.

Market crashes and bear markets do not necessarily occur simultaneously, and a bear market can occur without a market crash.

It is not definite what defines a market crash, but typically, it is a drop of 10% or more in stock prices over a period of many days.

The Panic of 1907, in which stock prices fell by almost 50% between 1907 and the following year, is a famous example, along with the 2008 financial crisis.

The most recent example is the stock market crash of 2020, which happened because of the lockdown  in the country due to the COVID-19 crisis.

Also Read: How long should you hold a stock?

How can you protect your investments during a market crash?

With the buzz, all around about stock market crashes, it is crucial to know that will stock market crash today or not is in our hands.

What we can do is to take adequate measures to protect our portfolio from a stock market crash in India.

There are a few credible ways to shield your portfolio from stock market crash today like :

(i) Diversification in your portfolio:

Diversification involves dividing your portfolio into stocks, bonds, cash, and other assets.

After doing the required research, you can add digital gold and even cryptocurrencies to your portfolio to avoid any significant harm from the stock market crashes

What proportion you will divide your fund among these assets depends on your risk tolerance and financial goals.

If you use a well-designed asset allocation strategy, you can avoid the adverse effects of putting all your eggs in one basket.

At the same time, it is also crucial to maintain an adequate cash reserve for a crisis. Let’s say when the stock market crashes become a reality, then you have funds to buy some stocks at the dip.

(ii) you should look for decent value stocks:

In the most simple terms, a value stock is one that is cheap relating to the profitability of the company and other fundamental features such as cash flow, book value, earnings, sales, and book value.

If you are holding a value stock, then you don’t have to worry about the question will the stock market crash today or not.

Value stocks can go down in the short term, but they are bound to go up in the long term.

As we learn from the experiences of legendary investors like Warren Buffett, we should try to invest as he does in betting on value stocks.

(iii) you should re-examine the fundamentals of your stock and should balance your portfolio accordingly:

if you think too much news will stock market crash today or not, then you should also be concerned about your chosen stocks.

You should consider reviewing your asset allocation and fundamentals of your stocks every six months.

If an asset class makes extraordinary returns or losses during a given time, it is beneficial to rebalance your portfolio.

For example, if your chosen stock of the company decides to change its future prospects and the top management, you should consider changing your allocation on that stock.

On the other hand, if your total portfolio consists of 40% of equities and 60% of different assets and by the year-end, if your equity allocation reaches 70% you should consider rebalancing your portfolio.

In addition to reducing the risk of investing in risky assets, this also helps protect investments from a bad market phase like the stock market crash 2021  by booking gains.

A stock market correction provides an opportunity to accumulate good stocks for a longer-term investor.

(iv) you should focus more on time that you stay in the market rather than timing the market:

If you see the historical records, then you can see that there is a big market crash in the global market every five years as an investor that is something in your hand.

Will stock market crashes or not you can’t do much about it, but you can be a part of this journey. You should focus on the long-term game if the market crashes.

You should rebalance your portfolio accordingly because eventually, your portfolio will recover after every crash.

Do not leave the market now, thinking you will return during the next rally. Market timing cannot be done consistently, one cannot sell at the top and buy at the bottom, no matter how hard they try.

You should aim for the next 20 years in between many crashes will happen, but you should focus on rebalancing your portfolio in between every crash.

(v) you should take advantage  of cost averaging :

You can take advantage of cost averaging if you are a long-term investor.

You should focus on picking quality stocks and should buy it repeatedly whenever the price go downs during the crash.

By using the process of averaging down, you can increase the value of your returns.

Conclusion

whether the stock market will crash today or not, that is not for us investors to decide.

We should focus on the controllable we should learn to survive through these crashes also we should take advantage of these crashes by cost averaging and rebalancing.

The crash of the stock market can cause people to panic-sell their shares, causing them to lose money. As an investor, we should not fear from these crashes because that can lead to us loosing a lot of money.

Investors are advised to invest in companies that will be relevant in the stock market in the next 30 years, based on Warren Buffet’s tips.

There’s nothing wrong with having some losses here and there, as long as you don’t invest money that you can’t afford to lose in the process.

Further Reading:

Investopedia

Team R Wealth

Team R Wealth

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