If a Market Crash Is Coming, Here's the 1 Exact Move You Should Be Making Today, According to History
Key Points
Diversification is key -- only owning growth stocks can work against you if the market crashes.
Sometimes stocks in certain categories move together, and some stocks don't recover from crashes.
Safer stocks provide protection when there's volatility, and Dividend Kings pay you under all circumstances.
A market crash is defined by a sudden and intense loss of market value. Because of its dramatic fashion, it's usually unanticipated, although in some cases, the signs are there.
The most recent crash was when the COVID-19 pandemic started in March 2020. Lockdown orders and business closures sparked concern about the economy, and the S&P 500 (SNPINDEX: ^GSPC) lost 34% from its February high through its March low. It was the quickest crash on record, and the index reached a new high just four months later.
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Smart investors manage through crashes and other market crises by holding onto their stocks and scouting for bargains. The best way to be prepared is to start diversifying your portfolio today.
Don't put all of your eggs in one basket
If all you have in your portfolio are hot stocks, you're not well diversified. Amazing growth stocks can certainly be an important part of a long-term portfolio, but owning them alone is risky for a number of reasons. First, they often come in categories. Today's hot stocks are mostly based around artificial intelligence (AI). Stocks like Nvidia, Micron Technology, and Bloom Energy all play a different role in the AI process, and they're all soaring.
But if something happens to AI as a category, these stocks could all fall at the same time. If most of your money is tied up in one category, it's not resilient.
Second, high-growth tech stocks can be risky themselves. Some tech stocks, like memory stocks, often move in cycles. If you're concentrated in risky tech stocks, some of your holdings may not recover, even when the market does. Today's top tech stocks aren't the same ones from 10 or 20 years ago, with some notable exceptions like Apple and Amazon. Before the dot-com bubble burst in 1999, for example, Global Crossing was a major telecom company that eventually went bust, and Cisco Systems lost so much value that it didn't surpass its 2000 high until last year.
Finally, even the ones that do recover don't offer protection when a crash strikes. There's no way to know how long a crash will last, and if it's prolonged, you may need your money before it recovers, or you may be tempted to sell out of fear.
What is a diversified portfolio?
Real diversification involves a group of about 50 stocks of all categories and classes. That gives your portfolio the strength it needs for times of expansion and times of contraction. Safe stocks can protect your assets when the market crashes and give you the security to hold on.
These are stocks like Coca-Cola and Procter & Gamble, two Dividend Kings that have performed well under pressure historically and have continued to raise their dividends under all circumstances. They have increased their dividends for 64 and 70 years respectively. That's passive income even when the market plummets.
A diversified portfolio allows you to benefit from gains in growth stocks right now, when they're on fire, while setting up your portfolio with safe stocks to manage through market volatility.
Jennifer Saibil has positions in Apple. The Motley Fool has positions in and recommends Amazon, Apple, Bloom Energy, Cisco Systems, Micron Technology, and Nvidia. The Motley Fool has a disclosure policy.