Afraid of a stock market crash? Find out how to keep your money safe before it happens!

7 min readAug 5, 2024

We all worry about money. It is easy to understand why one would be apprehensive about having little or no money. But we also fret when we have money. This is especially true if our money is invested in the stock market and there is a market collapse. In 2020, during the 1st wave of the COVID-19 pandemic, stock markets plummeted dramatically and grabbed most investors unaware.

While a crash in stock markets or a market correction is impossible to forecast, there are many tactics that investors can employ to limit its impact on their investment portfolio.

In this article, we will investigate six tactics that investors can use to lessen the impact of a stock market decline on their investments.

1. Resist the urge to make panic purchases.

Similar to making panic sells during a market collapse, it is likewise crucial that you do not make panic buys during a market crash. Panic purchasing can be described as a state of mind that encourages you to make investments indiscriminately, which can become an obstacle to accomplishing your present investment goals.

After all, when markets are down, it frequently appears to be the perfect moment to invest at fair valuations. In such instances, investors generally invest in blue-chip equities or acquire index funds.

However, in such cases, many investors neglect one crucial aspect of equity investing: their risk appetite. When markets tank, the purchasing fervor can drive investors to invest in equity far beyond their actual risk appetite.

So instead of panic purchasing, you should plan for these assets before markets actually tank. But to do this, you need to know how high or low your risk tolerance is. Only then will you be able to precisely assess how much of your existing portfolio can be transferred from low-risk assets such as debt mutual funds and fixed deposits to higher-risk assets such as equity mutual funds.

2. Keep your portfolio rebalanced.

Portfolio rebalancing is a strategy that helps you minimize the total risk in your investment portfolio so that you can earn higher risk-adjusted returns on your investments. This technique entails acquiring and selling investments frequently so that the weight of each asset class is maintained as per your intended allocation.

So, the first stage in rebalancing your portfolio is to have an asset allocation strategy in place. If you don’t have an asset allocation plan in place already, a stock market fall affords you the ideal opportunity to take stock of your current investments. Some significant elements to consider while reviewing your present investments are:

What am I invested in? Mutual funds, stocks, bonds, gold, etc.
What’s the value of my investments?
What are my financial goals?
What do I concentrate on while developing my investment portfolio — cconstant returns, increases in capital, etc.?
Once you have answered these questions and have a goal allocation in place for distinct asset classes, you can correctly figure out your present condition. Then you can pick which investments you need to buy or sell to accomplish your asset allocation objective.

If done effectively, rebalancing your portfolio will not only help you stay on course to meet your financial objectives, but also help control overall portfolio risk when markets are tumultuous. That said, it might not be a beneficial idea to rebalance your portfolio in the midst of a stock market crisis. Instead, you should consider letting markets settle down a bit before rebalancing your investment portfolio.

3. Take advantage of tax laws.

The earnings made by selling mutual funds or equities are termed capital gains, and these are subject to capital gains tax rules. A collapse in the stock markets can be a perfect opportunity to boost the post-tax profits on your investment by utilizing a practice called tax-loss harvesting.

Tax-loss harvesting entails selling your mutual funds or equities at a loss in order to generate a capital loss. This capital loss can then be adjusted against capital gains from other investments to lower your tax burden and raise the post-tax earnings from your investments.

The tax loss harvesting approach is extensively utilized by investors towards the conclusion of the financial year, i.e., in the months of February and March. But this is not a firm and fast rule, so the strategy can be utilized at any moment during a financial year. A market meltdown offers the ideal chance to record a capital loss by dumping some of the poorly performing mutual funds or equities in your portfolio and replacing them with potentially higher-performing investments.

Investors can also take advantage of tax-loss harvesting when they are rebalancing their investment portfolio. This can significantly reduce your annual tax liability while also enhancing the asset allocation mix of your investment portfolio.

4. Protect your personal finances.

A stock market decline affects a lot more than just the value of your financial portfolio. In truth, financial markets can have an impact on employment, the real estate market, product consumption, inflation, and much more. Thus, stock market volatility can have a varied influence on various individuals, but there are a few things that you can do to reduce this impact.

Create a personal cash flow statement.

A cash flow statement is a record of all the money that is flowing in and going out on a daily basis. By maintaining a personal cash flow statement, you can plan your finances better so that a stock market decline does not affect your capacity to take on vital obligations such as electricity bills, rent, tuition fees, etc.

Furthermore, carefully documenting your costs can help reduce costly and frequently unnecessary expenditures such as expensive dinners, unused gym memberships, spa treatments, and so on.

Create an emergency fund.

Another way to protect yourself financially in the event of an emergency is to establish an emergency fund. Be sure to start an emergency fund soon. If you already have an emergency fund, a stock market meltdown is a good trigger to consider topping up the fund with an additional sum of up to 2 to 3 months’ expenses.

Manage Your Debt

A stock market meltdown, as a rule, is not the best time to take on new debt. If you do so, you run the risk of becoming caught in a precarious economic scenario. Furthermore, a market downturn could be a great time to refinance current debt, such as a home loan, personal loan, or credit card, particularly if you have a strong credit score and have paid your EMIs on time.

5. Invest in Equities, But Choose Carefully

Stocks are cheaper when stock markets collapse, but it is important to be careful when making these investments. One strategy to take advantage of the lower cost of equity is to adjust the allocation for long-term investments such as the National Pension System (NPS) and Unit-Linked Insurance Plans (ULIPs). Both NPS and ULIPs are long-term investments with multi-year lock-in periods.

A stock market fall provides you with the perfect opportunity to boost your equity allocation at a fair cost, allowing you to transition to a more aggressive asset allocation from a comparatively conservative allocation. This is because equity investments, particularly when purchased at low values, offer an unequaled ability to improve your investment returns for long-term goals such as retirement.

After a market crisis, you might also consider purchasing equity mutual funds and stocks when valuations are low. In that manner, you might be able to make very large profits when markets rebound at a later time. For example, if you examine the broad-based NIFTY 500 Index, you will discover that this index has gone up by 75% in the preceding year, which is huge. But you must make sure you complete appropriate research when selecting individual equities to invest in.

This is because, when markets recover from a crash, not all equities generate strong returns. In fact, since the market collapse of 2020, many renowned names such as Yes Bank, United Spirits, Abbott India, and Bharti Airtel have produced negative returns to date.

So, if you intend to make equity investments during a market correction, make sure you complete the appropriate research. But if you do not know how to value companies or don’t have the time to explore investment possibilities, it can be a superior idea to invest in professionally managed diversified equity mutual funds as compared to investing in individual stocks.

6. Focus on Making Long-Term Investments

When stock markets tank, a few questions crop up every time:

Will the stock market plummet down to zero?
Will the economy recover?
Can stock prices increase from here?

Every time the responses are the same, the stock market does not go down to zero, the economy always recovers, and stock values go up, reaching new all-time highs.

While short-term volatility is unavoidable when investing in equity, how this volatility affects you is entirely up to you. If you are investing for the long term, these ups and downs in the stock market should not disturb you.

So if you are investing for the long term, you should maintain a level head and not pay too much attention to market changes. Instead, focus on your actions by executing the following:

Resist the impulse to engage in frantic purchasing and selling.

Make sure your portfolio is rebalanced and you are taking advantage of tax laws.

Protect your financial flows.

Understand that volatility is an inherent element of the investment process, and there will be many more market corrections in the future.

Bottom Line

A stock market decline offers investors a unique opportunity to expand their fortunes. But to take advantage of this disaster, you must have a plan in place before the crash occurs. The six tactics outlined above are designed to help you not only weather a market meltdown better but also make sure that you can expand your wealth substantially when markets recover at a later date.