Hereâs what you may want to do â and avoid doing â as you maneuver through an extended decline
Itâs totally normal to get a little worried when you see the value of your investments drop. You might be thinking, âIs this what a bear market looks like? And what should I do now?â
âA bear market is when major U.S. stock indices, like the S&P 500, drop by 20% or more from their peak,â explains Marci McGregor, head of Portfolio Strategy for the Chief Investment Office (CIO), Merrill and Bank of America Private Bank. âThere have been more than 21 bear markets in the S&P 500 since 1928,1 and they usually last less than a year, compared to the multiyear span of a typical bull market,â she adds.
Down markets can be unsettling, but there are ways to keep things in perspective and maybe even benefit from the situation. Here are seven tips from McGregor and other experts from the CIO to help you get through a prolonged market downturn.
1. Donât react impulsively. When the market takes a dive, itâs tempting to pull out your money until things look better. But that can lead to costly mistakes, partly because itâs never obvious when to get back in the market. Selling when the market is down means you might lock in a permanent loss and miss the recovery. The key is to stay in the market for the long haul, not to try and time it.
TIP: Be patient, tune out the daily ups and downs of the market and stay focused on your long-term goals.
2. Ask yourself: How quickly might I need to draw down my assets. In a bull market, itâs easy to forget how tough it can be when your assets lose value. If youâre nearing retirement, it might be smart to sit down with your advisor and look at your risk. âInvestors with longer time horizons can usually handle market volatility. But if you need to access your investments soon, consider a more conservative approach,â says McGregor.
TIP: Consider moving assets that you may need to draw upon in the next year into Treasurys or money market funds
3. Diversify your portfolio. âOne way to limit the impact of a market downturn is to diversify a U.S. stock portfolio with other kinds of investments, including international stocks; longer-term, high-quality bonds like treasurys and high-grade corporate and municipal bonds; and other assets,â says Matthew Diczok, head of Fixed Income Strategy, Chief Investment Office, Merrill and Bank of America Private Bank. By mixing in bonds and cash with your stocks, you might be able to smooth out some of the marketâs ups and downs, potentially losing less in the downturns.
TIP: Look for ways to increase your portfolioâs diversification within as well as across asset classes.
4. Keep investing regularly. By putting a fixed amount of money into your investments at regular intervals, youâre more likely to buy stocks at lower prices and potentially see them rise in value when the market recovers. This strategy, called dollar cost averaging, can be efficient when the market is down.
5. Look for strategic opportunities. In a downturn, defensive stocks like consumer staples, healthcare and utilities, as well as companies with strong balance sheets, can offer opportunities. Higher-quality stocks that pay dividends, especially shares of companies that have consistently grown their dividends, might help boost your total return when stock prices are falling.
TIP: Look for buying opportunities that volatility might create â for instance, among stocks that might have been overvalued before.
6. Rebalance your portfolio. During a long bull market, your stocks might grow faster than your bonds or cash, throwing your portfolio out of balance. Use this time to fix any imbalances. If your portfolio has strayed from your strategic plan, consider moving some assets to address the imbalance. For example, if your stock portfolio has grown beyond your target asset allocation, it may be time to rebalance a portion of it into bonds.
TIP: Doing this on a regular basis can help keep your portfolio aligned to your goals, timelines and risk tolerance.
7. Keep things in perspective. No matter how long or deep the downturn, markets have bounced back in the past. âBear markets have happened in the past, and history shows that markets recover and grow higher than before,â says McGregor. âInvestors who stay calm and disciplined during a negative market are likely to avoid common mistakes and potentially enjoy better times ahead. The longer you stay invested, the better your chances of meeting your long-term goals.â
TIP: Stay in touch with your advisor throughout any prolonged downturn. They can talk you through the risks and opportunities and suggest ways you can respond to help you stay on track as you pursue your goals. Â And as markets begin their recovery, they can help you take advantage of changing conditions.
Are you worried about the next big market crash? You’re not alone. As I watch the market fluctuations these days I’ve been wondering where should I put my money before things go south? It’s a question that keeps many investors up at night, especially with all the economic uncertainty we’re facing right now.
Let me tell ya – preparing for a market crash isn’t about predicting exactly when it’ll happen (that’s nearly impossible), but about making sure your financial house is in order when it does. I’ve researched the best strategies to protect your hard-earned cash, and I’m sharing them all here.
Whether you’re planning for retirement or just trying to preserve your wealth, these six smart moves can help shield your money from a financial hurricane Let’s dive in!
Why Worry About a Market Crash?
Look, market crashes are part of the investing game. Even though they’re not super common, history shows they happen periodically:
- The 1929 crash kicked off the Great Depression with 80%+ losses
- Black Monday in 1987 saw a one-day 25% market plunge
- The 2000 Dot-Com bubble burst cut the S&P 500 almost in half
- The 2008 financial crisis wiped out nearly half of market value
- The 2020 COVID crash caused a 30% drop in just one month
I remember the 2008 crash vividly – watching my modest portfolio shrink by thousands in just days was gut-wrenching. That’s why I’m so passionate about preparation now.
6 Smart Places to Put Your Money Before a Market Crash
1. Diversify Your Portfolio
Diversification is probably the single most important strategy to protect yourself from market turmoil. It’s like not putting all your eggs in one basket – if one basket falls, you don’t lose everything.
What does good diversification look like? Spread your investments across:
- Individual stocks (but not all in one industry)
- Bonds (government and high-quality corporate)
- Cash and cash equivalents
- Real estate investments
- Precious metals
- ETFs and mutual funds
You might even consider small alternative investments like producing oil and gas projects if your risk profile allows.
I personally aim for roughly 50% stocks, 30% bonds, 10% cash, and 10% alternatives depending on market conditions – though this balance shifts as I get older (more on that later).
2. Move to Cash or Cash Equivalents
When professional traders sense trouble, they often move to cash. This strategy gives you two huge advantages:
- Protection from market drops
- Opportunity to buy back in at lower prices
Cash equivalents include:
- Money market accounts
- Treasury bills
- Certificates of deposit (CDs)
- High-yield savings accounts
Right now, many high-yield savings accounts are offering 4-5% interest – not bad for a “safe” investment!
One investor friend of mine moved 40% of his portfolio to cash in early 2020 based on some economic indicators he was watching. When the COVID crash hit, he was able to reinvest at fantastic prices in March and April, supercharging his returns in the recovery.
3. Get Guaranteed Investments
While guaranteed investments typically offer lower returns, they provide stability during turbulent times. Consider allocating some portion of your portfolio to these options:
Short-term investors should look at:
- Bank-issued CDs
- Treasury securities
Longer-term investors might consider:
- Fixed or indexed annuities
- Indexed universal life insurance products
- Corporate bonds from blue-chip companies
- Preferred stocks from stable companies
I’ve personally found that having about 20% of my portfolio in these guaranteed investments helps me sleep better at night, knowing that portion is relatively secure no matter what the market does.
4. Hedge Your Bets
If you’re convinced a downturn is coming, you can actually position yourself to profit from it. This is more advanced territory but worth understanding:
Options for hedging include:
- Shorting stocks: Selling borrowed shares hoping to buy them back cheaper later
- Put options: Contracts that increase in value when the underlying security drops
- Inverse ETFs: Funds designed to move in the opposite direction of a market index
A word of caution: these strategies involve more risk and complexity than standard investing. I’ve used put options occasionally as “insurance” on positions I didn’t want to sell, but I treat them as exactly that – insurance I’m willing to pay for, not speculative bets.
5. Pay Off High-Interest Debt
This might not sound like an “investment” strategy, but paying off debt before a market crash is incredibly smart. Here’s why:
- Eliminates monthly obligations when cash might get tight
- Provides guaranteed “returns” equal to the interest rate you’re paying
- Improves your financial stability during uncertain times
If you’re paying 18% interest on credit cards, paying that off is like getting an 18% guaranteed return – better than almost any investment could offer!
Back in 2019, I prioritized paying off my car loan before adding more to my investment accounts. When the pandemic hit and things got uncertain, having one less monthly payment gave me tremendous peace of mind.
6. Find Tax Advantages in Market Declines
If you do experience losses in a market decline, you can use tax strategies to soften the blow:
Tax-loss harvesting allows you to:
- Sell losing investments to realize losses
- Use those losses to offset capital gains
- Deduct up to $3,000 against ordinary income
- Carry forward additional losses to future years
Roth conversions during market dips let you:
- Convert traditional IRA/401k assets to Roth accounts while values are lower
- Pay less tax on the conversion due to the decreased value
- Allow future recovery to happen tax-free in the Roth account
I used this strategy during the 2020 market drop, converting a portion of my traditional IRA to a Roth when values were down about 25%. The market recovery happened tax-free in my Roth account – one of my smarter financial moves!
What to Do During an Actual Market Crash
If a crash happens before you’ve fully prepared, don’t panic! Here’s what to do:
-
Know what you own and why: Review your original investment research and remind yourself why you bought each holding.
-
Trust in diversification: If you’re properly diversified, parts of your portfolio may hold up better than others.
-
Consider buying the dip: If you have cash available, market crashes present buying opportunities for long-term investors.
-
Get a second opinion: Consider consulting with a financial advisor who can provide objective perspective.
-
Focus on the long term: Remember that historically, markets always recover. Selling at the bottom locks in losses.
Tailoring Your Strategy Based on Your Timeline
Your approach should vary based on how soon you need the money:
| Time Horizon | Recommended Strategy |
|---|---|
| 0-2 years | Maximum safety: High-yield savings, money market, short-term CDs |
| 3-5 years | Conservative mix: 30% stocks, 50% bonds, 20% cash |
| 5-10 years | Moderate approach: 50% stocks, 40% bonds, 10% cash |
| 10+ years | Growth-oriented: 70%+ stocks with regular rebalancing |
I’m currently about 15 years from retirement, so I maintain a growth-oriented portfolio but keep enough in safer investments to weather a few years of turbulence without selling stocks at depressed prices.
Common Questions About Protecting Your Money
Is a market crash coming soon?
Honestly, nobody knows for sure. Despite what some “experts” claim, accurately predicting market crashes is nearly impossible. Instead of trying to time the market, focus on building a resilient portfolio.
Should I just sell everything and wait for the crash?
Generally, no. Market timing rarely works consistently. If you sell everything and the market continues rising for years, you’ll miss out on significant gains. Better to gradually adjust your asset allocation based on your risk tolerance and time horizon.
What investments perform well during market crashes?
Traditionally, these tend to hold up better:
- U.S. Treasury bonds
- Gold and some other precious metals
- Consumer staples stocks (think essential products people buy regardless of economy)
- Utilities and some healthcare stocks
- Cash and cash equivalents
How much of my portfolio should be “crash-proof”?
A common rule of thumb: subtract your age from 110 or 120, and that’s the percentage that can remain in stocks. The rest should be in more conservative investments. So at 40, you might have 70-80% in stocks and 20-30% in bonds and cash.
Final Thoughts: Prepare, Don’t Panic
The key to surviving market crashes isn’t about perfectly timing your exit and re-entry. It’s about preparing a diversified portfolio that can weather storms, maintaining liquidity to capitalize on opportunities, and having the emotional discipline to stick with your plan when others are panicking.
I’ve lived through several market downturns now, and each time I’ve learned that preparation beats prediction. By implementing these six strategies—diversification, increasing cash positions, securing guaranteed investments, strategic hedging, paying down debt, and planning for tax advantages—you’ll be in a much stronger position when the next market crash inevitably comes.
Remember, market crashes, while painful in the short term, have historically been temporary. The investors who survive and thrive are those who prepare sensibly and avoid making emotional decisions during the chaos.
What protective moves are you making with your portfolio right now? I’d love to hear your thoughts and strategies in the comments!
Take advantage when markets are down
While no one likes to see their balances fall, reduced asset values offer unique financial planning opportunities. Â Consider these strategies:
Tax-loss harvesting. In addition to benefiting from dollar-cost averaging or rebalancing into cheaper parts of the market when security prices are low, you may also find opportunities to offset taxes on gains through losses generated by strategic sales of underperforming securities.
Roth IRA conversions. When asset values are down, it may be a good time to consider moving traditional IRA assets to a Roth IRA. Assets are taxed during conversion, so lower asset prices may mean a smaller tax bill.
Estate moves. Itâs worth looking at your estate plan, as it may be beneficial to fund trusts and make certain gifts when asset prices are lower.
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