Because it is your money and you deserve to be prepared.
Fear the Market Fall! I hear it all of the time. There is so much doom and gloom that centers around the markets and how they will behave year after year. So many of my friends tell me that they are putting their money in cash to wait for the next crash. They’ve been saying that since 2015…
If you’re like me and you’re scared to lose money, I totally understand. I had to figure out that market recessions aren’t bad, so long as you take the right steps to take advantage of them as they happen. So the goal of this article will be to explain the steps you should take to be prepared for the next market downturn.
Here are the 7 steps you need to take right now to make sure that you are ready for the next market correction.
- Build up a rainy day fund.
- Reallocate your assets
- Automate investments
- Shift at least 20% into a fixed asset
- Diversify your investments and risk
- Trust in the companies you own
- Don’t buy or sell on emotion
Build up a Rainy Day Fund
To be prepared for an inevitable market crash, you need to have your finances in order. It is imperative that if you haven’t built up an emergency fund of 6 months, you need to make it your top priority. This does two things. This protects you in the event of job loss due to market instability. It also gives you a cushion to dip into if you need to buy stocks when the market hits lows.
You need to make sure that you and your family are well prepared for an inevitable market correction. Having built up your emergency fund will give you ample time to live off savings if you happen to be let go. This will keep you from making rash decisions and taking a job you either won’t like or won’t enjoy.
Reallocate your Assets
The problem with most people is that they never actively look at their portfolios. If you’re in a broad-based ETF like VOO or VTI, then you can’t really reallocate as that is handled through the ETF. However, suppose you’re holding a multitude of stocks or mutual funds invested in various sectors. In that case, you may want to reallocate your portfolio back to its original allocation.
This will help you manage risk. The reason is, you typically have one or two sectors that run up the gains. This would be in the tech sector in recent memory, like FAANG (Facebook, Amazon, Apple, Netflix, Google). To lock in those gains, you need to sell. You would then rebalance your portfolio based on your risk tolerance.
Automate your Investments
This is one that most people don’t often consider. When we allow emotion to dictate our investment decisions, we often lose. There is a reason for it. When you’re trying to time the markets, you have to be right twice. You have to be right when you sell, and you also need to be right when you buy.
I don’t know many people that are absolutely right on either end, let alone both. That is where automating your investments comes into play.
Rather than trying to time the market, you dollar cost average (DCA) into the market monthly. Set up your Roth or Traditional IRA to invest a specific amount each month, regardless of market conditions. This allows you to buy on both ends of the spectrum and potentially get a better price per share.
By automating your investments, you also take the emotion out of the process. You are investing in companies that you already believe in, and you will let them do the work for you.
Shift 20% to Fixed Buckets
Here is the deal, the markets can be volatile. That is a good thing. If it just went straight up, you would purchase fewer and fewer shares each time you bought in. While you would see gains, you wouldn’t lock in huge profits that the market can be known to produce.
Suppose you position 20% of your assets into a fixed bucket. In that case, this will alleviate some of the pain when the markets correct. This is because you now have 20% of your portfolio in a non-correlated asset. All that means is that the assets aren’t invested directly in the market.
This serves to protect against that volatility and market drop. It also gives you more buying power when you’re ready to shift funds back into the market. If you have a lower risk tolerance or you’re closer to retirement, you shouldn’t put 100% of your assets into the market.
If this is the case for you, then pivot and add more assets to your fixed bucket, say 30% or 40%. Then peel off 20% of that and put it back into the market when it corrects. This is your buying power, and this is where you can make more considerable gains on the rebound.
Diversify Your Investments and Risks
The one mistake that people make is that they put 100% of their eggs into one or two baskets. For example, they may have a strong belief in Amazon, or Apple, or even Tesla. This is great when you have little wealth, but your goal is to keep it as your overall wealth grows.
The best way to do that is by diversifying your risk across various investments. This is why I like the S&P 500 index. You’ve invested in a broad array of companies and their performance. That means if one or two have a terrible year, you’re not left holding duds. It is also incredibly inexpensive to use a firm like Vanguard and their VOO ETF.
There are a few different paths to take here. You have the ‘bogleheads,’ which you can find https://www.bogleheads.org/wiki/Asset_allocation. Their 3 funds lazy portfolio is 33% in TIPS / Bonds, 34% in US Stocks, and 33% in International Stocks.

You also have Ray Dalio and his All-Weather Portfolio. This is another take, and you should have a mix of 30% in stocks, 7.5% in commodities, 7.5% in gold, 15% in Intermediate Bonds, and 40% in Long-Term Bonds.

These two portfolios should give you an idea of how your overall portfolio could be structured for diversity.
Trust In The Companies You Own
Do you trust the companies in your portfolio? Have you done your due diligence on your stocks? This is geared for those not invested in a broad-based index fund and instead focus on a stock portfolio.
The truth of the matter is, if you have done your research and you believe in the company, you need to hold. If news comes out that will change its validity, such as embezzlement or drowning in debt, then that is cause to reevaluate your position. The point here is, don’t just sell because you’ve seen the value go down. This leads us to …
Don’t Buy and Sell based on emotion
The adage of buy low, sell high is the way you succeed in the market. What average investors do instead is follow FOMO. This is the fear of missing out. People all jump in on the hype train after a stock gets moving, and they all buy it as it nears its peak.
When the stock starts to plummet, they hold on, not really knowing what to do. When investors go from green to red, meaning they are losing money, they get worried. After they’ve lost 20% or so, they start selling. That is their first mistake. The second is that they stay out of the market until after the next run has begun.
This has you losing by buying high and then losing more by selling at a loss. The truth is, if it is a dependable company, you don’t win or lose until you sell. If you see a pullback and you’re invested in a strong company, the best thing you can do is go against your gut and buy more of the stock. It is our emotion that keeps us down, not our wit.
To Wrap Up
Here we talked about the 7 simple steps you can take today to start preparing yourself for the next market downturn. As we mentioned, no one has a crystal ball to tell you the absolute top of the market. Nor does anyone have a magic 8 ball that can predict the bottom.
The truth is, since the beginning of the market, history has shown us that the market always hits new highs eventually. You need to have a plan. The plan will help you stay on track when everything in your body tells you to do the opposite.
If you put these 7 simple steps into action, you’ll be ready for the next market correction.
Disclaimer: JustMyLittleMess does not provide tax, investment, or financial services and advice. The information is presented without considering the investment objectives, risk tolerance, or financial circumstances of any specific investor. It might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk, including the possible loss of principal.