Many investors are worried about a stock market correction at a time when the S&P 500 and Nasdaq are at or near all-time highs, despite 6.7% unemployment and an additional 6.7 million Americans employed only part time for economic reasons. If the market crashes, trillions in equity value will be wiped out overnight, and the prospect of losing even 10%-20% of your retirement portfolio is certainly harrowing. However, investors also must account for the possibility that the market will continue to rise for multiple years.
Overreacting, behaving emotionally, and being guided by fear are generally recipes for disaster for investors. The best long-term outcomes are achieved by adhering to established portfolio allocation principles and sticking with them, even through difficult periods. Slight adjustments can be made based on changing conditions, but it’s bad practice to move too far from the plan. Consider these three ways to be responsibly prepared for a potential market crash.