The Blog

4 Ways to Protect Against a Stock Market Crash

As Warren Buffett (one of the greatest investors of our generation) puts it, there’s only one rule of investing in markets – never lose money!

The good news is that you don’t need to have Buffet’s financial knowledge to hedge against a severe market fall.

In the world of investments, a stock market crash (market correction) is typically defined as a fall of at least 10 percent from a recent high.

Here are steps you can take to insulate yourself from the inevitable market crash if you have your retirement funds or life savings invested in the market.

1. Ensure You Have A Cash Reserve

Investing is a numbers game. The worst thing you can do is sell your investments when the markets are falling. The likely result is you missing the eventual market rebound.

Avoid this by holding a little more cash. A cash reserve will help pay for unexpected expenditures and avoid panic in a bad market. If the market crashes, you can use the cash to buy stocks at cheaper prices (more on this later). Remember Buffett? He sits on a whopping $149.2 billion of cash on hand!

If you don’t have a cash reserve, pull some money out of the stock market. Do you have investments that have generated handsome returns, but you’re unsure about their future performance? You can liquidate them and build an emergency kitty.

2. Make Sure You Are Invested in Quality Assets

If you are invested in individual stocks, make sure they have long-term potential. By this, I mean focusing on value investments. Well-established companies with experienced management teams have strong fundamentals and don’t trade at obscene multiples.

In the event of a market correction, these companies can use their cash reserves to shore up balance sheets. This will increase your chances of receiving consistent and reliable dividends.

Another way to protect your investment from systematic risk is by investing in uncorrelated markets.

Assets and commodities that don’t move in tandem with the stock market might be a great way to prepare for a crisis. Even in times of recession, these will remain profitable.

Real estate and commodities are some of the assets you can invest in to ward off the effects of a stock market crash. You don’t have to be super-rich to invest in real estate, thanks to real estate crowdfunding and Real Estate Investment Trusts (REITs).

3. Buy Strategically During the Crash for Higher Returns (i.e. Stocks Are on Sale)

At the beginning of 2020, fear over the potential effects of COVD-19 made the S&P 500 tumble by a third.

With concerns of their money evaporating, some investors bailed out of stocks and had to pay dearly to restore their holdings when the market came galloping back.

A market crash creates opportunities. Make the best of the situation by buying strategically from such panicky investors. This is the right time to splurge on stocks and funds you have had your eyes on at steep discounts.

4. Keep A Diversified Portfolio of Assets

Do you know why institutional investors always seem to make a profit whether it’s a boom or recession? Two words – diversified portfolio! Investing in wide-ranging assets across diverse geographical regions and sectors can help minimize losses during periods of volatility.

Most individual investors have a very basic portfolio comprising 70 percent stock and 30 percent bonds. While this traditional composition is a little diversified, it doesn’t work in times of recession.

A foolproof strategy is diversifying your investment portfolio even further to make sure that you have a finger in every pie. Creating a deeper and more broadly diversified portfolio by owning many investments in more than one asset class reduces unsystematic risk. The gains from one asset class will help offset the losses from another.

You can balance your portfolio by investing in stocks, bonds, property, cash or money market securities, art and collectibles, cryptocurrencies, etc. What percentage you devote to each category will depend on your tolerance for risk and time frame.


While you can’t predict when a market crash will occur, it helps to be prepared against any potential stock market storms.

Note that not all these strategies will suit you or your risk tolerance. But following one or two may well help preserve your capital—and help you sleep better at night. Isn’t that what we all want?