A stock market crash might be scary to think about, but it doesn’t have to be. If you have the right strategies in place, the potential chaos can be turned into an opportunity to build your portfolio. Imagine it like getting ready for a storm: there’s no way to stop it, but you can make sure your home is locked down and ready to face the storm’s force.
During this scenario, diversification is your best friend. Spreading investments broadly across different sectors, regions, and asset classes when markets are volatile helps compensate for potential loss. Let’s say you’re only investing in stocks; don’t stick to just stocks, throw in a little bit of bonds and some cash equivalents. Another smart choice is gold because it often does well in market crashes. A little over 10 to 15 percent of your portfolio can be allocated to gold as a good hedge.
Think about sector diversification, too. Essential goods and services are what defensive sectors like healthcare, FMCG, and utilities do, and they remain stable during tough times. If you don’t want to get too carried away, you can pair them with growth sectors like IT or pharma to balance your portfolio. If you want even more security, look into geographical diversification by way of international ETFs or mutual funds. Significantly reducing risk is adding 20% exposure in international markets.
Cash reserves are a must. Let’s imagine you had the ability to buy great stocks at discounted prices during a crash. That edge is 3-6 months of living expenses in savings and another 10-15% of your portfolio in cash equivalents. While it’s true that cash in hand is about safety, it’s also about being ready to take advantage of opportunities.
Then, you can guard your portfolio with defensive stocks. Healthcare, utility and FMCG companies usually have stable earnings, even in a downturn. In a situation where you are not positive that the business will generate cash, look for businesses with strong balance sheets, consistently positive cash flow, and low debt. They tend to crash better and recover faster.
Let’s talk stop-loss orders. During market crashes, these are a lifesaver. Placing a stop loss at 10 - 15% below the current stock price can set you within limits. It’s an automated way to reduce your risks. Be sure to check them and readjust them from time to time, though, so they are not tied to market conditions.
So is rebalancing your portfolio. However, your allocations move around over time as a result of market fluctuations. This means that you can keep your desired risk level by rebalancing once a year or whenever your allocation deviates from your target by too large of an amount. In fact, investors who rebalanced in the 2020 market crash also had better risk-adjusted returns than those who did not.
Stock market crashes are temporary, and you can remember. Every major crash that the Indian market has gone through, the market has bounced back. For example, after the 2008 financial crisis, the Sensex fell to 9,716 but it took less than 2 years to cross 20,000.
To avoid emotional decisions and stay on track with your goals, keeping a long-term perspective is key. Diversify, be informed, and concentrate on quality. While crashes seem scary, they don’t have to be; with the right preparation, crashes can be opportunities to reinforce your portfolio.