Back in the pandemic days, everything was a mess, and the stock market was riding like a roller coaster. The global market suffered a huge fall triggering a short-lived bear market where the fall was around 20%. As a result, it then entered into an economic recession.
But after sinking in March, the stock market started to make its way back to retrieval. By the time December 31, 2020, the stock market regained its position back again. All the major indexes grew in 2020.
- Dow Jones gained 6.6%
- Nasdaq gained 43.7%
- S&P gained 15.6%
But still, the danger is not yet over. We have a long road of 2021 ahead of us. No one can predict whether the stock is again going to crash in 2021, but we can gain experience from the past.
The reason why the stock market can crash again in 2021
By looking into the past, here are some reason why the stock market can crash again:
- Unemployment: Though many people got their job back after the hit of 2020, we are still not fully employed. There is still a significant percentage of unemployment that is yet to recover.
- COVID 19: Coronavirus is not yet over there are still new strains developing and will take time to bring it in control.
- Inflation: With present government spending, most probably the inflation is going to hit in future. As a result, investors will start pulling back.
Ways to prepare yourself for the crash
Seeing why the stock market can crash again, it is better to prepare yourself before it does. Here are some ways:
- Set aside a percentage for your stock watch list
Not everyone can bear the risk of throwing money in the stock market right after it has crashed. However, if you have a substantial emergency fund, high-risk tolerance and no credit card debt, you should set aside a part of your savings as a investment apps south africa watch list so you can buy after prices drop.
But the thing to keep in mind is, the stock you are buying should be the one you want to own. Please don’t buy it because it’s cheap because it might still be cheap when you sell it.
- Sell the stock that you don’t want in the next five years.
Don’t wait for the perfect time, if you want to sell and buy stocks online then do it now. This advice is not only applicable when the stock is going to crash; it is valid every time. So, if you are holding a stock that is losing its advantages and no longer fits your investment theorem, it’s time to sell them off while the market is still strong.
Likewise, is the case for cash out. The thumb rule you need to follow is not to invest in a stock you don’t need in the next five years.
- Hide your money in a saving account
If you don’t have money in your emergency fund, you cannot afford to lose money in a stock market crash. Insufficient cash reserves, unfortunate expenses, and a job loss will ultimately leave you with no choice than to raid investment that you have stocked up for so long.
Have a goal of putting aside six months’ necessary expenses in your bank account. If you get 401 company matches again invest for the full contribution. But until you have not put aside, sufficient emergency funds put a hold on investment.
- Do not put all money in one sector.
The top ten stocks under S&P 500 includes mostly tech stocks and account for around 27% of its weight. So if you have put all your money on S&P funds, you are overly exposed to the tech sector. But this does not mean it’s time to sell all your winners.
However, if you have extra funds to invest, it’s better to diversify your portfolio. You can try investing in defensive stock which usually remains stable even after a bear market. Furthermore, utility and consumer staples stock are other examples that remain stable on the economic cycle because the demand holds still.
- Avoid investing on margin.
It’s ok to borrow from your broker to invest more money in the market when it’s on a surge because it results in amplifying your returns.
But when you invest it when the market is going to crash, it also amplifies your loss. Suppose, you invest $ 5000 cash on a stock that drops sharply, your loss is 50%. But if you borrowed more $ 5000 from your broker, the loss you will bear is $ 10,000. In the case, you will lose more than 100% you owe your broker ($5000 plus interest).
Two stocks that you can buy when the stock market crashes
Many stocks will tempt you during the stock market crash. However, the two stocks you can consider buying in a market crash are Canadian National Railway and Lightspeed POS Inc.
Canadian National Railway comes under one of the most long-term core stock that you can own. The company is always stable even in the case of a bear market. Plus, it keeps on flourishing with the economy over the period, which is why it makes it a good option for the high-quality stock to form the core of your portfolio.
On the other hand, Lightspeed is a rapidly growing tech stock. Technology sectors have great potential when the market is favourable. However, you can notice during the last year market crash the stock tanked severely. In the starting of the year and also in bottom March Lightspeed lost two-third of its value. This ratio depicts what an excellent opportunity stock market creates to purchase long-term growth stocks like Lightspeed.
Many investors are expecting the stock market to crash again in 2021. Several stocks have regained its position from the previous crash, yet uncertainty remains elevated. Many expected after the vaccine is out, everything will come back to normal, but after initial bump, the investors are now cautious. So, it’s better to take all the precautions you can before the market crashes. And when it does, take advantage of it by buying long-term core stocks at low rates.