Eight way to prepare for a stock market dive

Stocks are a gamble and they come with highs and lows. Be more prepared for the next low by following these tips. 

An investor speaks on her mobile phone as she walks in front of an electronic board showing stock information at a brokerage house in Hangzhou, Zhejiang province, China, October 8, 2015.

If the stock market downturn in August freaked you out, you may find it helpful to be more prepared for the next time stocks take a dive. While there's little value in panicking and assuming the markets will tumble, there are certain things investors can do to ease their minds and protect their assets.

Consider these eight ways to get ready for the next market downturn.

1. Assess What Money You May Need Soon

If you are investing with some short-term goals in mind, it's worth taking stock of how much money you may need in the near future. For instance, if you have some investments set aside to pay for your child's college and he or she is graduating high school in a few months, it might make sense to withdraw in advance of a drop.

2. Save Up for Some Deals!

There's nothing worse than having great stocks available on the cheap, but not having the cash to buy them. Now's the time to save up so you can pounce when the values are good.

3. Get More Conservative

Anyone approaching retirement age should think about shifting investments from stocks to more stable investments, such as bonds or cash. Hopefully, this is something you've been doing anyway as you've gotten older, but if you believe the market is on the cusp of a dive, it's worth evaluating whether you should accelerate this transition.

4. Take a Look at Gold

Since the dawn of time, gold has been used as protection against disaster. It can be a good investment if interest rates rise, as many people have historically flocked to it during times of geopolitical uncertainty. Gold is cheap right now, so adding some to your portfolio could be a helpful antidote to a market downturn.

5. Prepare a Tax Loss Harvesting Strategy

If you sold investments earlier in the year and are on the hook for capital gains taxes, you may be able to offset those taxes by reporting losses from elsewhere in your portfolio. This is called tax loss harvesting. Now is the time to assess which stocks have dropped in value since you bought them, and which may be poised for a drop. A thoughtful tax loss harvesting strategy will help you avoid capital gains taxes and may even reduce your taxes from earned income.

6. Read Up

A stock market downturn can be a scary thing, in part because it's sometimes hard to discern whether the dip is a result of bad company financials or broader macroeconomic effects at work. This is when it's helpful to study earnings reports and balance sheets to get a good read on a company's health. Armed with knowledge, you'll be able to get a better handle on a stock's true worth.

7. Give Yourself a History Lesson

For many people, the thought of a stock market dive can make them sick to their stomach and keep them up at night. It helps to know that historically, the market always rebounds after decline, often quickly to new heights. Consider that since the end of World War II, the S&P 500 has had a losing year just 15 times, and only three times has there been a decline in consecutive years.

8. Do Nothing

Stock markets go up. They go down. If you are investing with a long time horizon, your investment strategy should remain simple and consistent, and should not change because the market hits a rough patch.

This article is from Tim Lemke of Wise Bread, an award-winning personal finance and credit card comparison website.

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