While no one – not even the most experienced stock broker on Wall Street – can predict the next market collapse, it’s wise to be prepared if and when the next one occurs. Markets can fall due to several economic factors, such as unexpected inflation, deflation, declining economic growth or sudden shock to the financial markets, points out Forbes. Each of these economic issues require you to approach asset allocation a bit differently. Taking action before a stock market crash occurs rather than after it happens is key. This means your plan should start today. While your investments are rising steadily (hopefully you have an adequate plan in place!), that could all change at any time.
Invest in Bonds
Bonds are the solution to hedge again equity exposure; if economic growth were to suddenly plunge or any other economic factor were to take a hit, bonds will likely rise even as equities fall. At least, that’s what history tells us. Some factors, such as rising inflation, can harm both stocks and bonds, but for general purposes, bonds are a safe bet. Therefore, you should choose bonds that benefit from increased inflation, like VNQ and TIPS (Treasury Inflation Protected Securities).
To further protect your investments, consider international diversification when it comes to stock selection. When you select U.S. stocks solely, you run the risk of a sub-optimal risk/return, whereas building international stocks into your portfolio can smooth out those returns.
Again, not even the smartest stock expert can time the market perfectly, which is why you shouldn’t even try. Trying to analyze and predict timing may even hurt your investment performance because you’ll be too occupied jumping in and out and spending less time actually invested in the market. Your allocation, when done right, should work for you at all times, not just before and after a crash but during.
Just in case you’re interested in long-term market activity, check out this S&P 500 chart showing market activity since the late 1970s.
Be Wary of High-Volatility Stocks
High-volatility stocks are often hit the hardest when a crash occurs. Names like Morgan Stanley and First Solar are examples of these types of stocks that have an impressive long-term potential but also the most potential to lose money quickly if things go south, says The Motley Fool. To safeguard against this, consider the beta of any stocks you own. You don’t have to look far: it’s usually listed right on the stock quote page. This beta is what tells you how reactive the stock is to changes in the market. If you see a beta of 1.0, this means the stock is in line to move according to the S&P 500. Anything more than a beta of 1.0 is an indication the stock will react more violently to market swings. So, to put it into perspective: Morgan Stanley has a beta of 2.1, meaning this stock is at least twice as sensitive to market change as the typical S&P 500 stock.
Knowing how to navigate the stock market is a tricky game. Many people hire a stock broker or financial planner to help them play the game. Be careful who you trust with your lifetime investments, and always know the name of a securities attorney just in case.
Thomas Law Group is here to help you recover losses brought on by reckless stock brokers. Give us a call if you feel you have been victimized by misrepresentation or excessive trading.