2020 was a horrible year for millions of individuals due to the coronavirus pandemic. There was social distancing, lockdowns, business closures, and economic fear everywhere. While many of us are glad to say goodbye to 2020; the past year was however a good year with equities experiencing double digit gains. The S&P 500 rose 16.3% over the past year and the Dow Jones Industrial Average rose 7.3% respectively. The pandemic benefitted tech stocks the most as the NASDAQ rose 43.6% as online advertising and online spending ballooned. Investors saw huge gains in their retirement plans, brokerage accounts, and investment apps. This year however, we are due for a pullback. In order to make sure you hold onto these gains, make these 5 moves to properly prepare for a market crash.
1. Reevaluate Your Portfolio
Make sure your portfolio is properly balanced. The current stock market rally has probably led to your portfolio being too heavily tilted towards stocks. If your portfolio is over 75% invested in stocks, then you are too stock heavy. A well diversified portfolio has a healthy mixture of stocks and other income generating investments. Check all of your statement balances and calculate how much of your portfolio is in each asset class and each sector. You should never have more than 20% of your portfolio in any one stock or sector. For example, if your portfolio has 50% of your money in the FANG stocks (Amazon, Facebook, Netflix, and Google), then your portfolio is too tech heavy. Although they are all great companies, they should not comprise half of your portfolio. If the tech sector takes a downswing in 2021, then you will experience severe losses. Make sure you are not overly invested in any one sector.
2. Reduce Your Riskiest Positions
While growth stocks outperform during bull markets; they tend to underperform during bear markets. Now is the time to book some profits in your riskier stock positions that are overvalued. While I still love stocks like Snowflake, Netflix, and Square; they are no longer the screaming buys that they once were. I expect all of these stocks to dip during 2021. They are trading at significantly higher multiples than they were at the beginning of 2020. I expect small and midcap tech stocks to suffer the biggest pullback in 2020. Be careful with small and midcap stocks in 2021.
3. Pay Attention To The Industries You Invest In
Watch out for riskier industries. Traditional retail stocks and restaurant stocks will continue to face treacherous headwinds in 2021. Many of these companies will face a liquidity crunch in the coming year or worse face bankruptcy. Companies like J.C. Penney will likely be toast in 2021. Be sure to only invest in companies in these sectors with wide economic moats, access to capital, and strong balance sheets.
4. Add Some Dividend Payers
Large cap dividend stocks are a hub of safety during a topsy turvy market. I have found that my best performing stocks over the long term have been dividend payers. Dividend reinvestments allow you to add to your position without investing any more of your own capital. They also help to increase your portfolio return each year providing you with positive returns in a down market. Companies that pay dividends generate significant cash flow and have stronger balance sheets giving them the ability to weather severe economic downturns. Currently, I love companies like Abbvie, Pepsi, and JPMorgan Chase which have dividend yields in the 3 and 4 percent range.
Buy Some Bonds
Bond interest rates are very low right now and are not as attractive as in years past. But you must have some exposure to bonds in your portfolio. They add guaranteed income paid out on a fixed basis. You can add corporate bonds or buy a bond fund. Another way to add bond exposure is to buy good ole fashioned savings bonds. I personally buy I bonds every year through the Treasury Direct government website. I Bonds are currently paying just 1.68% but that rate resets every six months. The next rate reset will be in April of 2021. These bonds do extremely well when inflation rises. I bonds are easy to buy as they can be purchased in $25 denominations. I like that I can buy them, forget about them, and just let them accumulate interest over the years.
Remember that at MultiplyMyMoney, we take a long-term investing focus. If the market dips in 2021, then see this as a great buying opportunity for companies that you believe in. Continue to invest during market dips and maintain a dollar cost averaging strategy. A consistent and steady investing strategy will have you on the path to millionaire status! Remember the best investors are long-term investors. These tips should have you well prepared for a market crash.