By Rachel Jones

Every person who invests in something experiences a risk of losing the profit. Economic crises have happened before, and they will happen again. But don’t be discouraged from investing in assets. You don’t want to miss out on excellent opportunities to earn income long-term.

The crisis may come, but you can be prepared. That’s what this article is about. You should prepare and protect your assets from market crashes. One of the methods to prepare for an economic downfall is diversification. We will discuss diversification and other protection methods in this article. 

Understanding A Market Crash

The term “market crash” refers to an abrupt and significant drop in securities pricing, such as company shares or stocks. A crash is sometimes called a “selloff.” It is typically caused by investors dumping their assets because they lose faith in the economy’s or given asset’s future.

For instance, the stock market could fall because traders fear investor confidence will suffer when global economic growth rates decline. As investor confidence deteriorates, more asset holders sell their investments at any moment. Those who sell their assets sooner than others will manage to keep their funds, but not most asset holders.

Such a situation significantly reduces share values in minutes, if not seconds. A reduction in share price immediately reflects a loss for individuals who own given stock. 

Undoubtedly, it’s a situation you want to protect yourself from. Investing in a 100% safe asset is impossible since there is no such thing. However, it’s possible to invest in various types of assets to at least save some portion of your funds. That’s why many experts talk about portfolio diversification. 

What Is Diversification?

Diversification typically refers to a diversified portfolio. Most people have heard this popular saying that states, “don’t put all eggs in one basket,” that’s almost what a diversified portfolio means. A diversified portfolio is a collection of several investments that work together to lower an investor’s overall risk profile. 

Diversification entails holding stocks from various industries, risk profiles, and countries. Typically, a diversified portfolio consists of such assets as commodities, bonds, real estate, and cryptocurrency (the latter is rather optional). 

These numerous assets work together to lower an investor’s risk of permanent capital loss and the overall volatility of their portfolio. For example, if an individual invests all funds in cryptocurrency and the market crashes, the person will experience unimaginable loss. 

The returns from a diverse portfolio are often lower than what an investor would earn if they could choose a single winning stock. But it’s a much safer option. 

How Diversification Works?

When the economy is growing or stable, stocks perform well. Investors want the biggest profits, so stock prices rise. Because they are hopeful about the future, they are ready to tolerate a higher chance of a crash.

When the economy decreases, stocks and overall all securities with fixed income perform well. Investors are more concerned about preserving their investments during such times; they rarely even consider profiting. They are ready to accept lesser profits in exchange for risk reduction as no one wants to lose their years of work.

Commodity prices are affected by supply and demand. Oil and gold are examples of commodities. Wheat is also considered a commodity as it is influenced by supply and demand. For example, wheat prices typically rise if a drought limits supplies. Similarly, if there is an excess supply, oil prices will decline.

Logically, investors buy assets of all these types if they want to diversify. Even if one of their assets loses its value, the investor won’t lose a fortune. 

Tips To Protect Your Investments

Now that you know what a crash is and how diversification helps, let’s check some tips to protect your investments. Note: diversification is a method to protect investments, but it’s best to use several options. The tips go as follows:

• Diversify.
• Don’t sell in a panic.
• Use stop-loss tools.

Now let’s delve into details.

Diversify

Based on your age and risk tolerance, consider investing most of your retirement assets in stock mutual funds, individual stocks, or exchange-traded funds (ETFs). However, you must be prepared to relocate money into something safer if a crisis appears.

Today, we can invest in the following assets:

• stocks and bonds;
• real estate;
• annuities;
• cash value life insurance;
• precious metals.

This is just a short list of investments to choose from. Each has its level of risk. You may experiment with different assets, such as a minor stake in a producing oil and gas production.

Spreading your wealth over many of these categories is the most outstanding approach to guarantee that you have some assets that are still valuable and survive the crash. 

Don’t Sell In A Panic

When the market crashes, you must be cautious with your assets and avoid selling because of fear or panic. Most investors rarely recover the money they lost on an investment. So, rather than going through the effort of selling assets for nothing or little gains, it makes sense to keep your investments until they are at a price where you can afford them.

If the stock market goes down, specific companies might be strong enough to endure such an economic downfall. So don’t pull out all of your investments at once, they might survive the crash, and you’ll sell them in vain.

Use Stop-Loss Tools

A stop-loss mechanism recommends the seller sell a security at the market price if it hits a certain price. Typically, individuals use stop-loss tools when concerned about the security’s value. 

For example, they don’t want to risk losing profit if the asset’s value decreases after they purchase it. Stop-loss orders are costly for investors since using this tool entails paying brokerage and taxes each time the order is executed. This adds to the losses you will incur due to the crisis.

Final Thoughts

Unfortunately, there is no way to tell what assets are safe. If there were such a way, trading could’ve been less profitable. We don’t live in a perfect world, but we can use all possible strategies to secure our investments. 

About the Author

Rachel Jones is a freelance writer working for the company ICOholder global analytics platform with the largest crypto database. It is distinguished by the ease of writing and the ability to interest the reader. Always creates original content.