The investment research firm Ned Davis found that each 1% increase in household net worth is associated with a 0.4% year-over-year increase in consumption in the following quarter. (4)

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So seeing your stocks soaring might spur you to splurge. Be careful: You don’t want to overspend and then see the value of your investments crash.

Meanwhile, as a growing number of Americans do splash out, the “wealth effect” is hiding weakness in the economy.

The top 10% of earners who make more than $250,000 per year account for more than 49% of all spending, up from 35% in the 1990s. (5)

The majority of Americans are not doing as well, which bodes ill for the economy in general.

Hiring has been stagnant for most of the year, and the government shutdown will impact the economy further. (6)

A stock market crash could be devastating to the jobs market, threatening not just Americans’ investments, but their livelihoods.

It may seem counterintuitive, but the first thing to do to prepare for a market correction is to stay invested in some way — be it in the stock market, or bonds or some other security.

That’s better than converting all your investments into cash because the return on cash is zero.

That said, the recent stock runup is a good opportunity to examine your portfolio, revisit your goals and bring your investments into balance.

Reassess your risk appetite based on your age, income and investment time horizon.

Younger investors can usually handle more volatility, so keeping a stock-heavy mix makes sense as a driver of long-term growth.

Couples with small children and not much debt can cushion their portfolio against stock-market swings by moving some of it into bonds or bond funds.

Meanwhile, those with shorter time horizons — like couples with children entering college or those who are nearing retirement — may be better off with more stable investments allocated across stocks, bonds, and cash equivalents like short-term U.S. Treasury bills.

This more stable asset mix may also work for those who are worried about losing their job in a recession and who have fixed expenses.

Diversification is a safety feature, and you can get more diversification by selling single stocks or sector-based ETFs and reinvesting the money in all-market stock ETFs or bond funds.

International stock funds also may be a good way to hedge against a U.S. market correction.

Make sure you have liquid assets in FDIC-insured accounts, too — including an emergency fund that can cover three to six months of essential expenses.

In addition, keep cash equivalents like high-yield savings accounts, money market funds and short-term Treasuries so you are not forced to sell your stocks in a downturn.

Liquidity lets you sleep at night and stay invested when markets get rough.

We rely only on vetted sources and credible third-party reporting. For details, see our editorial ethics and guidelines.

Gallup (1); Morningstar (2); Statista (3); Nationwide (4); Washington Post (5); Reuters (6)

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