4 Ways to Crash-Proof Your Index Fund Portfolio
Index funds provide a great way to get started with investing. As you'll quickly learn, a portfolio that's 100% in stock index funds will also come with a great deal of risk. When the market turns south, you might wish that you had at least a portion of your assets in lower-risk investments. Here, we'll look at some of the things you can do to reduce the emotional response you might feel if the market tanks.
You can term this an "emergency fund," but it serves multiple purposes. First, the goal here is not to earn a maximum return. The goal of your cash reserves is to provide security and liquidity in the event of market turmoil.
When the market falls, the natural response is to want to sell your losing investments to avoid any further harm. If you have a share of your portfolio in cash, you don't need to worry as much about changes in your portfolio value, and the desire to sell long-term investments is muted. You're covered no matter what happens.
Source Fool.com
