The Motley Fool

Preparing For A Market Downturn

I recently wrote an article about how to protect your investment portfolio; it can be found here. In it, I discussed the idea of diversifying your portfolio so that it would be better equipped to handle a downturn.

Now let us shift the focus to how you can prepare and benefit from a downturn.

A stock market crash or pullback can be a daunting experience. It is a time when investors are hit with fears and worries. Although this is normal, having those emotions swirl in you can severely affect your ability to invest well and benefit from the pullback and subsequent upturn.

Historical data show that pullbacks are common in the markets. This means that investors should prepare for these situations so that they can respond to them in a more logical manner.

I have two suggestions that investors could employ:

1. Build up your cash reserves

With the market at an all-time high, it might seem like a wise time to chase the market. But, during this period, it would be prudent for investors to hold some cash, which can then be deployed at the right time.

Although holding cash might make it seem like your money is not earning a significant return as you wait for the market to pull back, the cash resource could be invaluable when the market falls and bargains appear.

2. Make a wish-list

Market pullbacks can be a scary experience, and it is also often a time that having a positive outlook is very difficult. This means, when you’re caught in such a situation, it is very likely that you won’t be able to make logical decisions – it would thus be difficult to buy stocks when they are at attractive prices.

For these reasons, investors should use the time now – when the market’s calm – to analyse the companies they are interested in and set purchase prices. By doing this, it allows an investor to study the company with a clear mind and set a purchase price which is logically calculated. Once the price is set, you are then ready for any pull-back. All you need to do is to execute the trades at the pre-determined prices.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice.