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HOW TO PREPARE FOR A MARKET DROP:
ONE: ALWAYS keep a 3-6 month emergency fund at all times.
I know I sound like a broken record when I say this NONSTOP, but it’s true – having 3-6 months worth of your expenses, saved up, in cash – at all times, is one of the easiest things you can do to make sure you’ll last through a stock market drop.
TWO: DIVERSIFY your investments throughout AS MANY DIFFERENT INDUSTRIES AS POSSIBLE.
That way, should ONE market fall…the others should be enough to offset that. And if the ENTIRE market falls…I’ve still got 20% in cash, on the sidelines, to keep buying in…even if my income drops.
THREE: KEEP BUYING IN.
Study after study show that the best thing you can do is just STICK TO YOUR PLAN, KEEP BUYING THE ENTIRE MARKET, and HOLD.
FOUR: DON’T PANIC SELL.
What I’ve seen SO MANY TIMES, is that the psychology that pushes you to sell because your investment is dropping…is going to be the same psychology that will hold you BACK when the market starts going up.
FIVE: KEEP A STEADY INCOME.
The WORST CASE SCENARIO isn’t just that the market drops…it’s that it falls, DURING A TIME that you lose your job and need to sell those investments to stay afloat. An emergency fund could hold you over 3-6 months while – hopefully – the market recovers – but, if it doesn’t – you want to make sure you have SOME consistent income to either continue buying in, OR – to pay your living expenses so you don’t have to sell during a time where everything is down.
SIX: KEEP MORE CASH
I’ll admit, statistically – this is NOT what you should be doing, and more often than not, investing your money all at once in the market will yield the best results – BUT, if you want to play it safe, and value peace of mind…keeping MORE cash on the sidelines is a way to do that.
SEVEN: STAY OUT OF MARGIN DEBT AND LEVERAGE.
I think it’s pretty safe to say, you’re playing with fire if you’re borrowing money to invest in the stock market, cryptocurrency, or any other speculative, short term asset. The ONLY EXCEPTION would be a “low interest” mortgage on a cash-flowing rental property that you intend to keep long term…but, besides that…stay out of debt, at all costs.
EIGHT: If you NEED this money in the next 3-5 years – it’s probably not a good idea to invest it.
A few years is not long enough to ensure that you’ll actually make money, and – as we’ve seen – there have been PLENTY OF TIMES throughout history where the market takes almost a DECADE to recover – so, the shorter your investment timeframe is – the less likely you should be invested in something that could drop in price.
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