5 simple ways to prepare for an ASX stock market crash

Preparing for a crash now will help you when it does happen.

A woman looks shocked as she drinks a coffee while reading the paper.

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Stock market crashes, or even corrections, can be truly terrifying events. Most of us invest in ASX shares to build our wealth over time and to plan for a comfortable retirement. So to see years of your hard-earned capital lose 15%, 20%, 30% or even 50% of their value over what can be just a few weeks can be heartbreaking. It can also lead to panic selling, which is one of the worst ways to stab yourself in the back.

Unfortunately perhaps, stock market crashes are inevitable. We get one every few years, as consistent as the tides. Sometimes we might have 10 years without one, and sometimes there can be only three or four years between crashes. They are unpredictable but dependable in their occurrence.

So in order to be ready for the next crash (which could happen next week, next year or next decade for all I know), let's talk about five ways you can prepare for the inevitable.

5 ways to prepare for the next ASX stock market crash

Understand what a market crash is

Understanding what exactly is a market crash is the first way you can help prepare for the next one. Market crashes are often caused by an underlying factor, such as a recession, credit crunch or (in 2020's case) a pandemic. But once one gets going, it's usually driven by investors' fear of losing money.

That's why you tend to see such savage drops in value. That's investors scrambling to pull their money out of the markets in fear of losing more. When you understand that a crash is driven primarily by this fear, it makes it easier to deal with on an emotional level. Not getting caught up in this panic is essential for surviving a crash with your wealth intact.

Have a plan

Leading on from our previous point, the second way you can prepare for a stock market crash is by having an action plan in place, ready for the next one to come around. If you spend time thinking about how you will handle a crash before it happens, there is a lower chance you will act in an emotionally driven way when it is happening and do something you will later bitterly regret.

So think about which companies you don't have too much confidence in your portfolio, or how much cash you'd like to have stashed away for some bargain buying.

Buy shares that you are confident can ride out the storm

It's important that you only buy shares that you are confident won't be terminally damaged by a recession or a market crash. If you own a company that is only just staying afloat during good times, how do you think it will fare when storm clouds fill the horizon?

The time to get out of a loser is when the sun is shining, not when everyone else realises that the company is headed for strife. This is tricky. No one knew that a pandemic was imminent in 2019, for example. But what is far more predictable is a recession. So make sure you fix any proverbial leaky roofs in your portfolio while the sun is shining.

Hold cash for the stock market crash

We already touched on this, but having a cash buffer is a great way to prepare for a recession. Many investors like to stay fully invested all of the time. It's a smart way to invest when markets go up more often than they go down. But some of the best investors like to build up a cash position too.

Cash doesn't lose its value during a crash like shares do. Plus, you can use this cash hoard to buy up shares of your favourite companies when everyone else is scrambling to sell them at a bargain basement price. That's how Warren Buffett has built most of his wealth, after all

Invest in defensive assets

I've left this one until last because I don't believe it is the best way to prepare for a crash, at least for ordinary investors. But some investors value certainty, capital protection and safety above all other factors when investing, so it's still worth discussing.

The final way one can prepare for a stock market crash is by investing in assets that typically hold their value or increase in value during tough economic times.

Those might include gold, government bonds, or infrastructure assets. These assets typically deliver lower returns than shares do over long periods of time. But they do usually hold up better than most shares during times of market stress or panic.

So for this reason, many investors like to allocate a certain percentage of their portfolios to these kinds of investments. If the idea of watching your portfolio lose 30%, 40% or even 50% of its value, even if it's temporary, spooks you to no end, then this might be a way of alleviating some of that fear. But you will probably risk some long-term returns if you do so.

Motley Fool contributor Sebastian Bowen has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

More on Investing Strategies

Woman laying with $100 notes around her, symbolising dividends.
Dividend Investing

How much dividend income does the average ASX investor earn?

It's an impressive amount!

Read more »

Person holding Australian dollar notes, symbolising dividends.
Dividend Investing

Which ASX 200 sector paid the best dividends in FY25?

We reveal the dividend returns of each of the 11 market sectors in FY25.

Read more »

A young woman sits at her desk in deep contemplation with her hand to her chin while seriously considering information she is reading on her laptop.
Dividend Investing

Are CBA shares still a good buy today for passive income?

Looking to earn passive income from ASX dividend stocks? Here’s my take on CBA shares.

Read more »

A happy young couple lie on a wooden deck using a skateboard for a pillow.
Dividend Investing

Where to invest $50,000 in ASX dividend shares

Let's see why these shares could help income investors build a strong portfolio.

Read more »

Man holding out Australian dollar notes, symbolising dividends.
Dividend Investing

2 Australian stocks with ultra safe dividend yields

These businesses have paid consistently-growing dividends for decades.

Read more »

Happy man holding Australian dollar notes, representing dividends.
Dividend Investing

$500 buys me 233 shares in this 10%-yielding income stock!

Macquarie expects this stock to offer big yields.

Read more »

Happy man working on his laptop.
Blue Chip Shares

3 ASX blue chips to buy before earnings season

Analysts recently named these shares as buys. Let's see what they are recommending.

Read more »

Man holding out Australian dollar notes, symbolising dividends.
Dividend Investing

Buy these high-yield ASX shares for major passive income in 2025 and beyond

Let's see why analysts think these shares could be great buys for income investors.

Read more »