4 Ways to Brace Your Portfolio to Sleep Easy in a Market Crash

You can’t stop a crash from happening, but you can get yourself in a position to ride it out better.

With the Federal Reserve finally getting serious about addressing inflation , there’s a real chance that the stock market could crash again. After all, if interest rates go up and the money supply contracts, borrowers will have to pay more and lenders will get more for loans. That makes lending more attractive for investors and leaves less money available for stocks.

If you’re an investor, you need to recognize that risk and prepare yourself for what could very well be rocky times ahead in the market. If you’re smart about it, you can do that without abandoning the long-term growth potential that stocks provide. With that in mind, these four ways to brace your portfolio to sleep easy in a market crash can help you get through the rocky investing seas we could very well be facing soon. Image source: Getty Images No. 1: Get your debts under control

It’s perfectly OK to invest when you have debt that is in control . If your debt is at a fixed and low rate, is easily coverable by your cash flow, and serves a purpose that helps make your future better, then it’s in control. If your debt doesn’t meet all those criteria, now is a great time to get it to where it does. The overall stock market isn’t all that far off its highs, and with the Federal Reserve broadcasting aggressive tightening, the window to get your debts in control may be closing quickly.

Paying off or refinancing your not-in-control debt will help you in a number of ways. First and most obviously, if rising rates force your debt payments higher, that directly takes more money out of your pocket. On a related note, if rising rates cause the stock market to fall, you’ll get that much more upset with yourself for not selling to get your debts under control when you could.

In addition, it’s never fun to see your stock portfolio fall. It can get quite difficult to hold on during tough markets, even if holding on would give you the best chance of participating in any recovery that follows. That urge to panic sell that often comes with a falling market will only be magnified if you’re worried about covering your bills or your debts with less money available to you. No. 2: Have a reasonable emergency fund

Typical financial guidance indicates that you should have a three-to-six month emergency fund available to you in something as risk-averse and as easy to tap as a savings account. This is important if the market crashes because market crashes and job losses often go hand in hand.

An emergency fund gives you a buffer to help you get through the initial shock of job loss without being forced to immediately sell your stocks to cover your costs. It also gives you a little bit of flexibility in the event you find yourself with a lower income while the economy goes through a rough patch.

The trade-off, of course, is that in today’s low interest rate and high inflation environment, the money in your emergency fund will be losing ground in real terms over time. As a result, as important as an emergency fund is to protecting your portfolio in a market crash, you don’t want to overdo it. That’s what makes a three- to six-month timeframe work well. No. 3: Keep money you know you’ll need to spend soon out of stocks

Money you need within the next five or so years does not belong in stocks . This is because once the market crashes, it might take years to recover. As a result, if you know you will need money from your portfolio within the next five years, it should be in something more conservative than stocks. That means things like CDs, cash, or duration-matched investment-grade or Treasury bonds.

This does mean that you likely won’t see much a return on that money, but chances are better that the money you’ll need will be there when you need it, even if the market turns sour. This is particularly important if the market crashes, as you’d otherwise have to either sell more shares or do without whatever it was that you were hoping to buy with that money. No. 4: Know the value of what you own

Ultimately, a share of stock is nothing more than an ownership stake in a company. That […]

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