How to prepare for a share market crash… before it's too late

The S&P/ASX 200 Index (ASX: XJO) peaked in October. At the time, there looked to be signals that it would end 2025 at an all-time high. However, now there are concerns that we're heading for a share market crash instead.

The ASX 200 closed in the red again on Wednesday afternoon. The index dropped another 0.22% to 8,7995.5 points. The latest decline means it has now fallen 3.2% from its peak in late-October. 

What happens to the Australian share market from here remains to be seen. But some market experts have pointed out that while Australia's share market might keep smashing its highs, at some point the market will eventually have to correct itself. 

And without a crystal ball, we don't know when.

But if we are heading for a share market crash at some point in the future, there are a few things investors can do to prepare… before it's too late.

Here are some steps you can take.

1. Don't panic

It's a good idea to keep yourself informed and on top of how markets are developing both in Australia and overseas, but be wary of panic-inducing news headlines and doomsayers' social media predictions. Focus only on reputable sources like The Motley Fool.

2. Review your portfolio exposure

Audit the stocks in your portfolio and make sure that you're not overly exposed to one sector. If they are, consider rebalancing. For example, the ASX 200 is dominated by companies in the financial and mining sectors, like Commonwealth Bank of Australia (ASX: CBA) and BHP Group Ltd (ASX: BHP), so too much exposure to only these stocks or sectors can increase your risk of volatility if or when the tide turns.

3. Keep some defensive stocks

During periods of low economic growth, volatility and uncertainty, demand for services from defensive companies tends to grow. This means that if investors have some defensive stocks in their share portfolio, it can help to hedge against potential risk. It may even act as a safety net in the event of a share market crash. Defensive shares are usually in the non-discretionary sectors like healthcare, utilities and consumer staples. This can include stocks like Wesfarmers Ltd (ASX: WES), AGL Energy Ltd (ASX: AGL), and even the likes of CSL Ltd (ASX: CSL).

4. Focus on dividend shares

High and consistent dividends can also help to cushion volatility amid a share market crash. Investors should look at dividend-paying companies which have strong balance sheets and reliable payouts. For example, Washington H. Soul Pattinson & Co Ltd (ASX: SOL) is often described as ASX dividend royalty. It has the longest streak of annual dividend increases on the index. The company has increased its dividend payout for its shareholders every year since 1998.

5. Keep cash on hand to pounce

As the world's most famous billionaire investor Warren Buffett says, instead of trying to predict how the market will act, investors should be prepared. That means being patient, avoiding being caught up in FOMO (the fear of missing out), and most importantly, keeping some cash at hand so they have options if stock market prices do suddenly drop. Investors should keep their eye on what they think could be good growth shares and pounce as soon they see a great opportunity. Remember, a share market crash could actually be a great time to buy high-quality stock at rock-bottom prices.

The post How to prepare for a share market crash… before it's too late appeared first on The Motley Fool Australia.

Motley Fool contributor Samantha Menzies has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended CSL, Washington H. Soul Pattinson and Company Limited, and Wesfarmers. The Motley Fool Australia has positions in and has recommended Washington H. Soul Pattinson and Company Limited. The Motley Fool Australia has recommended BHP Group, CSL, and Wesfarmers. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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