COVID-19, a worry that investors had pushed down their list of top concerns in recent months, has soared back up to the number one spot as a new variant spreads across South Africa.
Asia stocks outside Japan slid over 2%, Europe and U.S. stock futures are down sharply, oil prices drops almost 5%, the safe-haven yen is up around three-quarters of a percent, and U.S. Treasury yields are down almost 10 basis points.
Little is known of the variant, detected in South Africa, Botswana and Hong Kong, but scientists reckon it has an unusual combination of mutations and may be able to evade immune responses or make it more transmissible.
The news comes as Europe already battles a resurgent COVID-19 outbreak, triggering fresh restrictions that raise uncertainty over the near-term economic outlook.
Thin liquidity following Thursday's U.S. Thanksgiving Day holiday likely exacerbates price moves for sure, but there's little doubt overnight headlines have taken markets by surprise on Friday.
It’s been another great year for investors, with the SPDR S&P 500 ETF Trust up another 25.4% on the year. The S&P 500 has also made it more than a year since its last 10% correction, and some investors are growing concerned that a combination of historically high stock valuations, rising inflation, the COVID-19 variant and the possibility that aggressive Federal Reserve tightening could trigger a market crash in the next couple of quarters.
Historically, the S&P 500 has averaged about one 10% pullback per yearsince 1950. Long-term investors have no reason to fear temporary market pullbacks, but there are ways to prepare for the next stock market crash to reduce your risk and take advantage of the potential buying opportunity. Here are three things to do before the next stock market crash.
1. Diversify Your Portfolio
Not all market sectors and asset classes take the same hit when the stock market crashes, but it’s difficult to predict beforehand which stocks will be hit hardest. The market crash in 2008 hit bank and housing stocks hardest, while the crash in 2020 was particularly bad for travel and retail stocks. Growth stocks also tend to take a harder hit than value stocks during market crashes. By diversifying your portfolio into different types of stocks, bonds, commodities and other investments, you are ensuring that your portfolio won’t be overexposed to the worst parts of the next market crash or underexposed to any investments that may avoid the sell-off.
2. Raise Cash
There have been countless pullbacks, crashes and recessions throughout history. One strategy that has worked every single time for long-term investors during those periods is buying the dip. But to buy the dip, you must have cash or margin available.
If you are 100% invested, your hands will be tied and your only option may be tosell stockat the worst possible time. Market crashes are nearly impossible to predict, so there’s no need to dump all your stocks now and transition to all cash. But raising the amount of cash in your account to 10%, 20% or whatever level makes you feel more comfortable allows you to be opportunistic when the next crash happens.
3. Maintain A Watch List
Investors tend to not make the best, most rational decisions during the worst of a stock market crash. It’s best if you have a plan of action before the crash so that you aren’t trying to make emotional decisions when it seems like the sky is falling.
Before the stock market turns south, make a list of stocks you may potentially be interested in buying on the dip. Research these companies and vet them prior to the crash so that all you have to do when the opportunity to buy the dip arises is click that “buy” button.
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