5 Ways To Protect Your Portfolio From Crashes

by Andrew McGuinness     Jul 16, 2019

The market going up and down is a normal part of life, and stressing out over every dip is ill-advised. However, there are cases where the market crashes completely, with the bottom falling out and stocks dropping to new lows. Economic meltdowns do occur every now and then, and it’s important to know that you are prepared for the worst if it comes to be. There are certain ways you can protect your portfolio from major and long-term crashes in the market. Here are five ways to keep your nest egg safe:

1) Cash Out Early

This is one of the most difficult ways to protect your portfolio, but also one of the most effective. Why? Because telling the difference from your everyday ups and downs and a major market crash takes a serious amount of insight. Know when a dip is more than just a dip by keeping up with the news and keeping yourself informed. When all the stars have aligned and all the signs are pointing in the same direction, then don’t hesitate—cash out before the market drops.

2) Aim For Profits

If you can predict a major market crash before it happens, then you have the great opportunity to profit from this. It depends entirely on how much you are willing to risk—if you believe that a stock is about to drop, then sell it while it is high and buy it back when it’s back on the rise. You can also buy put options on the stocks that you own with options, allowing you to increase their value if the price drops, reducing your losses.

3) Diversify

If you don’t trust your ability to predict a market crash, then diversifying is the next best option. Diversifying your portfolio ensures that you won’t lose it all if one stock crashes out completely; you may lose everything you have in that one stock, but you will still have enough to start back up again. This eases your stress and anxiety with market crashes, making it easier to trade without worry.

4) Tax-Loss Harvesting

If you end up losing your investments during a market crash, tax-loss harvesting is still a great option you can turn to. This requires you to sell your losing positions and purchase them again after 31 days. Afterwards, write off your losses against your realized gains in those accounts, which will let you carry your excess losses to the next year and write off $3000 of losses every year.

5) Deal With Your Debt

When the market is starting to feel unsteady, then it may be time to begin liquidating your holdings to pay off any long-time debt you may have. Deal with high-interest debt, such as consumer loans and credit card debt, allowing you to have a stable balance sheet even while the market drops. It would also be a great idea to pay off your house or part of your mortgage. The bottom line? When the weather looks bad, now is not the time to be risky with your money.

Surviving the Crash

Here’s the truth: trading 101 teaches us that any crash will cause a downsize in your portfolio. Be ready to experience a reduction of your overall wealth during any crash or depression. However, doing nothing to prepare yourself for the inevitable is irresponsible for your investments. Do everything you can now to make sure you suffer the least amount of damage during a crash, whether that means derivatives, liquidity, diversification, tax-loss harvesting, or short sales.

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