Market Crash Concerns Keeping You Up at Night? 5 Ways to Brace Your

September served as a great reminder that stocks can go down as well as up. Although the market’s approximately 4.7% decline (including dividends) for the month may have felt painful, the ugly truth is that stocks have crashed much harder in the past. The reality of investing is that you have to be willing to take the risks to achieve the long-term potential returns, and market crashes are part of those risks.

If concerns about market crashes are keeping up at night, you’re not alone. Generally speaking, that’s a good sign that your finances may not yet be adequately prepared to handle them. If you want to be able to ride out a real downturn, you need to be ready for it in advance. With that in mind, here are five ways to brace your portfolio for the inevitable.

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No. 1: Have an emergency fund in cash

Especially in an environment where inflation is running above 5%, holding cash in a checking or savings account that’s earning less than 1% in interest might seem silly. In reality, an emergency fund is one of the most powerful tools at your disposal when it comes to dealing with market crashes.

That’s because stock market crashes and rising unemployment often go hand in hand. Without an emergency fund, if you find yourself jobless during a market crash, you could be forced to sell your stocks near the low just to cover your immediate costs of living.

Still, with cash providing returns well below inflation, it makes little sense to keep too much in cash. As a result, a reasonable guideline for an emergency fund is three to six months of expenses. That’s a decent balance to cover your immediate needs and allow you some time to make adjustments without being so large that it provides a significant drag on your long-term financial returns.

No. 2: Keep money you know you’ll need soon out of stocks

Whether you’re retired, looking to buy a house or car, or have kids approaching college age, chances are you’ll have costs coming up that are more than you can directly cover from your paycheck. Money you know you’ll need to spend from your savings within the next five years does not belong in stocks. CDs or duration-matched Treasury or investment-grade bonds are a much better place for that kind of savings.

Your goal with that money should be to have what you need when you need it, so that you don’t find yourself forced to sell your stocks near the low of a market crash. With those financial tools, you can often beat the return on cash, while still having the higher-certainty of those types of investments.

This is because it often takes years for the market to recover after a significant crash. With five years of money you’ll need to spend from your savings held outside stocks, you’ll have that much more flexibility to wait out a recovery without being forced to sell your stocks.

No. 3: Take your dividends as cash

In a rising market, it can be tempting to set your dividends to…