Is Your Portfolio Ready For The Next Crash?

 

It happened a few years ago, and will happen in the near future as well. Markets are far from a smooth ride and one thing you can count on is getting rocked once in a while.

Be Ready Before The Storm Strikes

When natural disasters occur, it’s usually about being prepared rather than what people do at that exact moment. Once disasters occur, it is usually too late to start scrambling around for shelter.

-Risk Only What You Can Afford To Lose: How much risk should your portfolio include? Enough for you to sleep well enough is what a friend of mine once told me. You should always know that assets such as equities could lose 20-30% or more in a short period of time while bonds would lose less. Knowing that, you can select an asset allocation mix that is right for you.
-Diversification: In any type of portfolio, lacking diversification can turn out to be a costly error. Even a few years ago, many dividend investors believed that holding a dividend portfolio that was very heavy on financial stocks was the way to go. These companies seemed to carry little risk, high yields and decent capital appreciation possibilities.
-Patience: When a storm occurs, many panic. Depending on the type of storm, that can translate into all kinds of reactions but in the financial markets, panic often translates into selling assets. It can sometimes be warranted but in most cases it means selling everything near the bottom and not profiting from the following markets rebound. Prepare yourself, know what to expect if within a few days your portfolio loses 15-20% or even more.
-Keep Liquidity: No matter which market, crashes usually go for longer than they should which translates into great buying opportunities for those that have liquidity to enter the market.

Remain Calm When It Happens

Since you know that a crash will occur at some point in the next few years, it is important to remember all of these things when it happens. It might look like you are overwhelmed and losing control but if you are able to avoid panic and being scared, you will able to act more rationally than most which will help you make better decisions. In all crashes, tremendous opportunities arise and being able to see them will give you a huge edge. If you do keep some liquidity, you will be able to buy some oversold assets. It is important to avoid trying to time these opportunities because it is nearly impossible to do. Buy underpriced assets knowing that they could easily decline even more before rebounding. It’s not about buying them at their cheapest price but simply being ahead 12-24 months later when the markets become more “rational”.

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