Are you ready for the next market crash?
How to prepare your portfolio for a market fall.
Most investors think they’re ready for a market crash. I think last year proved many wrong.
It’s easy to forget how quickly markets turn. In the space of a few days in April 2025, we saw one of the sharpest market selloffs on record, exceeded only by a handful of events in the past century: Covid, the GFC, the 1987 crash, and the Great Depression. A few weeks later commentary was filled with constant chatter about bubbles, stretched valuations and the next inevitable crash.
April wasn’t a long, grinding bear market. It was a jolt. And it revealed something uncomfortable. Some were willing to liquidate at almost every price. Just as quickly as it happened, markets rebound and the same commentators forecasting financial doomsday were forced to recalibrate.
Now you could argue whether the sellers were speculators or long-term investors succumbing to psychological pressure, but the distinction matters less than the behaviour. Even seasoned players can panic. Markets move in cycles and although no one can pinpoint the next crash, every investor can prepare themselves for one. I’m not here to provide my forecast or lean into prevailing pessimism but it’s often our behaviour that matters more than the cycles themselves.
Why talk about crashes now?
For the purpose of this article, we’ll characterise a crash as a rapid, steep decline in share prices that unfolds over a short period. These are often chaotic because markets can plunge, rebound and plunge again, much like we saw last April. This is very different to a prolonged bear market which grinds lower over months or years.
Forecasts for the next crash have been circulating for years. A 10 second google search will deliver pages of confident predictions on things that never eventuated. If investors acted on every warning, headline or piece of market noise, you’d likely do more damage to your portfolio than the downturns themselves. Constantly repositioning based on noise is really its own form of risk.
Why it matters
The impact of a crash on your finances will depend on a multitude of factors e.g. your time horizon, need for capital preservation and individual circumstances. Despite this, I think there’s a broader truth that applies to everyone. Market crashes can have an outsized influence on investment decisions and long-term outcomes.
It’s easy for me to encourage investors to ignore the market and tune out the noise, yet I distinctly recall moments last year when I’d watch my portfolio swing and feel the familiar tug to do something.
This isn’t a tactical guide about how to position your portfolio ahead of a downturn. Your investment philosophy will dictate that. This is how to set yourself up to respond thoughtfully rather than react emotionally.
Conduct a portfolio review
Arguably the most valuable step an investor can take is understanding exactly what they own. Unfortunately, a crash is often when many of us realise hidden concentrations and unintended risks. This will include checks like:
- Assess your asset allocation: The goal here isn’t to engineer the ‘perfect’ mix, rather it’s to ensure your allocation still reflects your risk tolerance and time horizon.
- Look for concentration risk: Strong performance in a single sector, geography or theme e.g. US mega-caps, can significantly skew your portfolio. Concentration isn’t inherently bad but again, it should be intentional.
- Consider the fees: Crashes are unpredictable but luckily the fees you pay aren’t. They also happen to be crucial to your investment outcomes. This is one of the variables fully within your control so it’s worth checking if you’re still getting value for what you’re paying.
Rebalance
Rebalancing is an effective tool to keep your portfolio in check, especially when valuations appear stretched with no sign of slowing. Over time, the relative performance of asset classes can reshape your allocations in ways that no longer reflect your risk tolerance or capacity.
For example, if you started five years ago with a 60/40 portfolio of Australian equities (12% returns per annum last five years) and government bonds (-0.1% return per annum over last five years), your allocation would have moved closer to ~75/25.
This drift isn’t a problem in and of itself, but your asset allocation is intended to be a reflection of your long-term goals and risk tolerance. Investors may be tempted to let the winners ride but might be left with higher exposure in the assets that may be most vulnerable to a correction. Importantly, this isn’t something we do to predict crashes or tactically time our exposures. It’s entirely possible that trimming outperforming asset classes may come at the opportunity cost of missing out on continued gains.
But nobody can consistently predict market movements. The idea is grounded in controlling for risk and re-asserting confidence in your original investment thesis, especially in the face of volatility. In practice, this can be done through scheduled intervals or threshold triggers. I wrote more on the process in this article.
Flee to cash?
“Far more money has been lost by investors in preparing for corrections, or anticipating corrections, than has been lost in the corrections themselves” - Peter Lynch
I don’t think there’s any harm in reassessing your liquidity reserves from time to time. Having enough cash for short-term needs is a core aspect of any sound financial plan. But investors who tend to flee to safety as a defensive reaction is a very different case.
Sometimes moving everything to cash can feel like the safest option. It doesn’t fluctuate in nominal value and it’s immediately accessible. During select periods the prevailing cash rate may also appear to have an attractive return. These qualities are increasingly important for investors near retirement or those who have short-term goals. But if you have a longer time horizon, it doesn’t make much sense to hoard additional cash once you’ve already established an emergency fund.
Running to cash during a market crash only protects long-term investors from one risk: further equity losses. But it doesn’t shield you from inflation eroding your purchasing power, the possibility of outliving your retirement savings or falling short of long-term goals because your portfolio didn’t grow enough. The psychological safety you gain will likely come at the expense of holding an asset with the lowest returns of any major asset class. Investors who retreat purely out of fear of an imminent crash often underestimate these trade‑offs.
I previously written about why cash alone can’t be used as a long-term wealth building strategy here.
Sit on your hands
When we’re at inflection points it’s easy to overstate the need to make a dramatic, reactive move, just to feel like we’re reasserting control. But there’s a large body of evidence that indicates investors attempting to make tactical shifts under duress is not just a sign of poor discipline, but also detrimental to their returns.
Early in 2025, the Morningstar US team looked at tactical allocation fund performance and found that even those who focus on asset allocation for a living haven’t shown the ability to improve returns by shifting a portfolio’s asset mix.
Our annual Mind the Gap study aims to examine the gap between investor results and reported total returns of a fund. The overall findings revealed that the average investor dollar in US managed funds and ETFs earned 7.0% annually over the decade ending Dec. 31, 2024. On the other hand, the funds themselves delivered an 8.2% aggregate annual return. That 1.2% shortfall reflects the cost poor decision-making skills. The returns gap stems from mistimed purchases and sales which are likely driven by emotionally irrational decisions.
This gap typically widens as volatility increases. The pandemic was a particularly difficult time for investors as many incurred heavy timing costs in 2020 (leading to an even wider 2% hap that year).
The economic uncertainty and the resulting investor confusion saw an inflow of funds in late 2019 and early 2020, followed by a mass exodus as markets fell, only for many investors to miss the rally over the ensuing months. Let’s take the S&P 500 for example: an investor who withdrew funds as they began plummeting in February 2020 missed out on the subsequent market rally of 2020 and 2021, which left markets up 40% by year end.
Now this isn’t a lesson on timing the market to capitalise on the highs and lows. In fact, it encourages the opposite. A crash typically doesn’t occur in a linear fashion, there’ll be mini recoveries and subsequent crashes that make picking the bottom virtually impossible.
Investors love to catastrophise every uptick in market concentration or valuation as a doomsday signal. It’s hard to argue that any of this noise is helpful. When markets are overly top-heavy with many names trading well above their fair value estimates, the fear is obvious: what happens if these giants tumble?
Whilst the argument might have some merit, I’m not sure the situation for all investors is as dire as it seems. I recently ran my portfolio through Sharesight using their exposure report function. It concluded that no single company accounted for more than 4% of my holdings. That’s hardly an outrageous or portfolio decimating level of concentration.
