How to prepare for a market crash

Diversification of portfolio – Ensure that investments in securities are diversified across industries and market cap. Ensure that the portfolio is not just a construction of an equity portfolio, but should contain all assets such as real estate, debt, secured debt (PPF, SSY,) , and even nothing wrong with postal schemes – the important point being your portfolio should be generated from your risk profile and financial goals, instead of a random thought of 50–50 or 40–60 split.

Execution of investments without markets [passive] – such as SIPs in mutual funds, PPFs/SSY on time, NPS etc. Once the diversified portfolio is constructed, the SIPs are important, investment in other instruments such as PPF, SSY need to be timed – such as investment in the first week of the financial month – but can be setup these days as an online bank transfer.

Monitoring of markets/review of portfolio [active] – An annual review of a half yearly monitoring of your assets is important, and if you have tied up with an RIA (Registered Investment Advisor), that job is usually taken care of. This is important, as at times, during a crash there may be an urge to investment more or pull out investments, and discussion with an RIA can help.

Now, can we time a market crash and be prepared for it?

We can never time a market crash

This is how markets behave; there are phases – expansion, peak, recession and then a bottoming out of the fall and then a rise again. As simple as it can be drawn on an x-y axis, it is not possible to time a 5% or 10% or 20% market correction or crash. However, diversification of portfolio and a passive investment method where market timing is not a factor can help to prepare for the correction or crash. During the crash, what is needed is some guidance as what needs to be corrected in the portfolio based on your goals and financial life.

The biggest problem I see is that whenever a crash happens, a lot of expert comments come up on Social Media urging to either exit or buy a product or equities. While this may appeal to the general mass, the recommendation may not always be the best for you – as your goals and life is different from that of the Social Media Guru’s life.

Answer to a question posted on Quora

Finvestor Social Media

Krishna Rath is a SEBI Registered Investment Adviser, and since 2015 has been educating netizens on investments and insurance. Krishna is a fee only SEBI RIA and is Odisha's first SEBI RIA. With background in IT, Krishna is changing the advisory space with new innovations in AdvisoryTech.

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