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How to Protect Your Portfolio from a Possible Market Crash

The stock market’s performance is no different from the seasons we experience in a year. While some months are gloomy and cloudy, others promise bright sunshine. The one thing that is constant is that it continues to offer you surprises – whether you like them or not. And since we are not certain if the next monsoon will bring happy dances in the rain or submerge us in floods, it’s wise to keep an umbrella handy.

Allow us to share some tips that will help your financial portfolio stay protected from a possible market crash.

Tip 1: Diversify Your Investment Portfolio

Don’t put all your eggs in one basket. Time to utilize these words of wisdom we were taught during our childhood. Experts suggest you shouldn’t concentrate all your savings in one place. Instead, to build a stronger portfolio, diversify your investment portfolio. Spread them across debt, equity, fixed deposits, and cash.

Tip 2: Be an Active Investor

As opposed to a passive investor, being an active investor will require you to keep a constant eye on how the market is performing. This will obviously consume some time, but it will help you understand the mood of the market better, which will eventually help you make better investment decisions.

You may also like to read: Even with 2019 General Elections, Indian Stock Markets Will Continue to Do Well

Tip 3: Consider ULIP as an Investment Option

ULIP is an underestimated insurance-cum-investment tool. Your money gets invested in the same types of financial instruments (equity and debt) in both mutual funds and ULIPs. Moreover, the returns are also very similar. However, it is wiser to invest in ULIPs because they offer the added advantage of life cover, which can help your family deal with financial crises that will undoubtedly occur as a result of your untimely death.

Tip 4: Sell a Portion of Your Best Performing Stock

This might not sound like a good idea on the face of it, but let’s dig a bit further in. By selling a small portion of your best performing stock, you will not only experience satisfaction on earning a significantly large amount, but you will also reduce the risk of the market dipping and you losing out on the profits of your stock market investments. The withdrawn amount can then be invested in a less risky instrument to further diversify your portfolio.

Tip 5: Create an Emergency Fund

Don’t let a market crash catch you off guard and cause you so much financial stress that you can’t even manage meager expenses. Create an emergency fund in advance to manage uncertain and unavoidable expenses such as hospitalization, child’s education, payment of an outstanding loan, to name a few. As the finance gurus say:

  • 5 – 6 times your monthly income is a good emergency fund amount.
  • It’s okay if your emergency fund earns 0% interest. Just stick with it.
  • Do not spend your emergency fund unless in an emergency.

Following these tips, or at least creating an emergency fund, will ensure that even if the market crashes, you will have enough resources to sail through until the market recovers. Having to sell your hard-earned investments at a bad price is a bitter pill to swallow, so put the aforementioned financial back-ups in place and they will cushion the impact if there ever is a market crash. 

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