How to Protect Your Finances Against Market Crashes
Check your current investment allocation., Identify why you fear a market crash., Consider holding money in a savings account., Invest in bonds., Consider annuities., Find safer stocks., Change your contributions., Diversify your portfolio.
Step-by-Step Guide
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Step 1: Check your current investment allocation.
You might have no idea what your retirement fund is currently invested in.
If not, log into your account and print out the current allocation of investments, which should include the following: stocks or stock mutual funds bonds real estate money market accounts -
Step 2: Identify why you fear a market crash.
The economy goes up and down with some regularity, and when the market crashes stocks suddenly become cheaper to buy.
For this reason, you might not want to diversify your portfolio.
Instead, you can leave your investments as they are.
However, you might want to reduce your exposure to risk if you are nearing your retirement age or have just entered retirement.A major stock market crash could seriously cut the amount of money you have to live on.
Your tolerance for risk might also have changed.
If so, then you can diversify your portfolio so that you are comfortable with your investment mix.
It’s impossible to predict exactly when the next recession will hit, so you shouldn’t move money in and out of the stock market hoping to get out just before things turn south.
For example, it looked like the U.S. stock market was about to crash in late
2015.
Since then, the Dow Jones Industrial Average has increased more than 20%. , The easiest way to protect your investments is to get out of stocks and move the money to savings accounts.
Consider the following options:
High-yield online savings accounts.
These accounts will only earn about 1-2% annually, but this amount is higher than most banks offer.
Your cash is liquid, so you can access it if needed.
Furthermore, your deposit will be protected by the Federal Deposit Insurance Corporation (FDIC) up to $250,000.
Money market accounts.
These accounts are like bank accounts but with potentially higher returns.
You can write checks against the money market account.
Open with your bank or with a company like Scottrade or TD Ameritrade.
Certificates of Deposit.
Banks and credit unions sell "CDs," which you can buy for a set sum.
You are prohibited from accessing the money until the CD matures, but you will earn interest on the investment. , Bonds are debt.
Companies, as well as governments, issue bonds to raise money, and bonds are a safer investment than stock.
Consider putting more of your investment into bonds, such as the following:
Municipal bonds.
State and local governments issue bonds to raise money, and in return the bonds are exempted from income taxes.
You can typically earn 3% annually on bonds.
They are a low-risk investment, unless the city government is on the verge of bankruptcy.
U.S. savings bonds.
These bonds are very safe.
With a Series I bond, you get a fixed interest rate, and your return is linked to inflation.
With the Series EE bond, you earn an automatic rate of return each month.
Treasury Inflation Protected Securities (TIPS).
The U.S. government offers a fixed interest rate as well as inflation protection that’s triggered every time inflation increases. , An annuity is a contract with an insurer or financial services company.
You make a lump sum payment, and in return you are provided with a fixed sum of money for a specific amount of time.There are several varieties of annuities, which can protect your investments in case of a market crash.
For example, fixed-indexed annuities can protect your principal.
Annuities are safer than stocks, but they do have some risks.
For example, the company you bought the annuity from could go bankrupt.
In that situation, you will no longer be paid.
You can protect yourself by doing thorough research and only buying an annuity from a company with the highest rating.
The value of an annuity can also erode with inflation, though you can buy annuities that will protect against inflation. , Not all companies are the same, and some are safer investments in a down economy than others.
For example, you might want to get rid of low-grade stock, such as companies with a lot of debt or businesses in speculative fields like biotech that have not yet produced strong profits.In a market crash, the value of these companies will decline.
Instead, look to high-quality stocks which tend to hold up better.
These companies have stable earnings and low debt.
Also consider stocks that pay dividends.
Check if you can invest in a dividend exchange-traded fund. , If you’re not yet in retirement, you should consider changing the allocation of your retirement contributions for the last few years before you stop working.
Direct your contributions toward safer investments, such as those discussed above.Changing your contributions will not change the allocation of investments already in your portfolio, so consider diversifying it. , When the market is good, riskier investments such as stocks perform well.
But when the market crashes, you can expect stocks to perform poorly.
Accordingly, you might want to diversity your portfolio and move some money out of stocks.
How much to move is up to you.
However, you don’t have to get out of stocks entirely.
Instead, you could reduce stocks to 30% of your portfolio, and have the other 70% in bonds or another safe investment.
In a market crash, your losses will remain in the single digits, and you can move back into stocks after the market improves.If you don’t know what to do, meet with a financial planner who can help you assess your risk tolerance and come up with a plan suited to your needs. -
Step 3: Consider holding money in a savings account.
-
Step 4: Invest in bonds.
-
Step 5: Consider annuities.
-
Step 6: Find safer stocks.
-
Step 7: Change your contributions.
-
Step 8: Diversify your portfolio.
Detailed Guide
You might have no idea what your retirement fund is currently invested in.
If not, log into your account and print out the current allocation of investments, which should include the following: stocks or stock mutual funds bonds real estate money market accounts
The economy goes up and down with some regularity, and when the market crashes stocks suddenly become cheaper to buy.
For this reason, you might not want to diversify your portfolio.
Instead, you can leave your investments as they are.
However, you might want to reduce your exposure to risk if you are nearing your retirement age or have just entered retirement.A major stock market crash could seriously cut the amount of money you have to live on.
Your tolerance for risk might also have changed.
If so, then you can diversify your portfolio so that you are comfortable with your investment mix.
It’s impossible to predict exactly when the next recession will hit, so you shouldn’t move money in and out of the stock market hoping to get out just before things turn south.
For example, it looked like the U.S. stock market was about to crash in late
2015.
Since then, the Dow Jones Industrial Average has increased more than 20%. , The easiest way to protect your investments is to get out of stocks and move the money to savings accounts.
Consider the following options:
High-yield online savings accounts.
These accounts will only earn about 1-2% annually, but this amount is higher than most banks offer.
Your cash is liquid, so you can access it if needed.
Furthermore, your deposit will be protected by the Federal Deposit Insurance Corporation (FDIC) up to $250,000.
Money market accounts.
These accounts are like bank accounts but with potentially higher returns.
You can write checks against the money market account.
Open with your bank or with a company like Scottrade or TD Ameritrade.
Certificates of Deposit.
Banks and credit unions sell "CDs," which you can buy for a set sum.
You are prohibited from accessing the money until the CD matures, but you will earn interest on the investment. , Bonds are debt.
Companies, as well as governments, issue bonds to raise money, and bonds are a safer investment than stock.
Consider putting more of your investment into bonds, such as the following:
Municipal bonds.
State and local governments issue bonds to raise money, and in return the bonds are exempted from income taxes.
You can typically earn 3% annually on bonds.
They are a low-risk investment, unless the city government is on the verge of bankruptcy.
U.S. savings bonds.
These bonds are very safe.
With a Series I bond, you get a fixed interest rate, and your return is linked to inflation.
With the Series EE bond, you earn an automatic rate of return each month.
Treasury Inflation Protected Securities (TIPS).
The U.S. government offers a fixed interest rate as well as inflation protection that’s triggered every time inflation increases. , An annuity is a contract with an insurer or financial services company.
You make a lump sum payment, and in return you are provided with a fixed sum of money for a specific amount of time.There are several varieties of annuities, which can protect your investments in case of a market crash.
For example, fixed-indexed annuities can protect your principal.
Annuities are safer than stocks, but they do have some risks.
For example, the company you bought the annuity from could go bankrupt.
In that situation, you will no longer be paid.
You can protect yourself by doing thorough research and only buying an annuity from a company with the highest rating.
The value of an annuity can also erode with inflation, though you can buy annuities that will protect against inflation. , Not all companies are the same, and some are safer investments in a down economy than others.
For example, you might want to get rid of low-grade stock, such as companies with a lot of debt or businesses in speculative fields like biotech that have not yet produced strong profits.In a market crash, the value of these companies will decline.
Instead, look to high-quality stocks which tend to hold up better.
These companies have stable earnings and low debt.
Also consider stocks that pay dividends.
Check if you can invest in a dividend exchange-traded fund. , If you’re not yet in retirement, you should consider changing the allocation of your retirement contributions for the last few years before you stop working.
Direct your contributions toward safer investments, such as those discussed above.Changing your contributions will not change the allocation of investments already in your portfolio, so consider diversifying it. , When the market is good, riskier investments such as stocks perform well.
But when the market crashes, you can expect stocks to perform poorly.
Accordingly, you might want to diversity your portfolio and move some money out of stocks.
How much to move is up to you.
However, you don’t have to get out of stocks entirely.
Instead, you could reduce stocks to 30% of your portfolio, and have the other 70% in bonds or another safe investment.
In a market crash, your losses will remain in the single digits, and you can move back into stocks after the market improves.If you don’t know what to do, meet with a financial planner who can help you assess your risk tolerance and come up with a plan suited to your needs.
About the Author
Amanda Scott
Committed to making DIY projects accessible and understandable for everyone.
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