Stock prices have soared since we entered the current bull market just over two years ago. As of Friday’s close, the S&P 500 (^GSPC 1.09%) is up by more than 24% this year alone, while the index has surged by 65% since it bottomed out in October 2022.
However, what goes up must come down eventually, and some investors are worried about where the market is headed. When asked about their six-month outlook, almost one-third of investors admitted they’re feeling “bearish” about the market’s future, according to the latest sentiment survey by the American Association of Individual Investors.
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To be clear, nobody knows for certain whether a downturn will begin in 2025 or not. The Federal Reserve Bank of New York predicts that there’s around a 34% chance that a recession will begin in the next 12 months, based on data from November.
These predictions aren’t always accurate, though. Case in point: In June 2023, forecasters at Deutsche Bank warned that there was a “near 100%” chance that a recession would strike in the next year. Not only did that not happen, but the market continued rising in 2024, when it set a series of new all-time highs.
In other words, there’s no way to know exactly when the next bear market or recession will begin. But there are three things I’m doing right now to prepare for whenever the next downturn hits.
1. I’m building up my emergency fund
It’s always a good idea to have at least three to six months’ worth of savings stashed in an emergency fund, but it’s especially critical when stock prices are falling.
The fastest way to lose money during a bear market is to sell your stocks after their prices fall below what you paid for them. If all of your cash is tied up in the market and you face an unexpected expense, you could be forced to sell your stocks after prices have plummeted — locking in potentially hefty losses.
The more robust your emergency fund, the easier it will be to leave your investments alone until stock prices recover. That can not only help you avoid selling at a less-than-ideal time, but it will also give your money more time to grow and maximize your long-term earnings.
2. I’m not trying to time the market
If you believe a downturn is right around the corner, it can be tempting to adjust your investment strategy accordingly — perhaps holding off on buying until prices drop, then snagging stocks at a steep discount.
While this approach makes sense in theory, it’s incredibly difficult to time the market accurately. For example, back in 2023 when Deutsche Bank analysts predicted a recession, they warned that it could begin as early as October of that year. If you’d stopped investing until October in hopes of buying at lower prices, you’d have ended up disappointed.
Not only did that recession not happen, but the market kept surging. By not investing prior to October, you’d have missed out on the chance to buy before stock prices skyrocketed.
Rather than trying to time the market, then, the safer approach is to simply invest consistently no matter what the market is doing. Even the experts can’t predict exactly what stock prices will do, and mistiming the market can be incredibly costly.
3. I’m double-checking all of my investments
Now more than ever, it’s critical to ensure every stock in your portfolio deserves to be there. Sometimes, shaky companies can appear to thrive when the market is surging. But just because a company’s stock price is surging, that doesn’t necessarily mean it’s healthy — and if the market takes a turn for the worse, these stocks will struggle the most to recover.
Right now is the perfect opportunity to double-check all of your stocks’ underlying fundamentals. Even if a stock was a strong investment when you bought it, things can change.
Check up on factors like the company’s financial history, its leadership team, and any industry changes that could affect its growth potential going forward. If you find that any of your stocks no longer fit your needs or carry more risk than you’re comfortable with, now could be a good time to unload them, while prices are still high.
The market’s future may be uncertain, but that doesn’t mean you can’t prepare. By beefing up your emergency fund, investing consistently, and ensuring you’re only investing in healthy companies, you can safeguard your portfolio no matter what’s on the horizon.
