Surviving Market Crashes: 7 Steps to Take so You Come Out Unscathed and Even a Bit More Wealthy

Timing is everything. Just imagine if you could have known when the real estate market was going to crash. You could have made millions or saved yourself a lot of heartache and money.

A former boss of mine is a big real estate investor. He’s made the bulk of his millions from rentals and flipping properties. He would buy distressed properties, fix them up and then re-sell them for more money or rent them out for way more than his monthly costs were on the property.

And unlike a lot of real estate investors he didn’t get caught in the housing market crash a few years back. Instead he stopped buying real estate altogether in 2004, a year before the crash. Everyone told him he was crazy. His investing partners thought he’d gone mad. But he was adamant.

How did he accurately predict the housing crash? He attributes it solely to a man who he hired to paint his house.

See Michael, my old boss, needed the interior of his beachfront mansion repainted. And because he’s got plenty of dough he hired someone to do it for him. He still did his due diligence and interviewed a few companies and picked one that gave him a good price and reasonable timeline.

When the company showed up to his house, he gave the painting crew of three men a tour of the rooms he wanted painted. As the crew was taping off the ceiling and covering the furniture they asked him for advice on how to become rich like him. They saw an obviously wealthy man and wanted to know how he built his fortune so that they could possibly do the same.

Michael told them he was retired now and just living off his passive investments and some consulting. He didn’t want to have a forty five minute conversation with them about all the ways he built his wealth. They were there to paint, not get a lesson in wealth accumulation. Two of the men seemed to accept this vague answer and went back to work. The third wasn’t satisfied with that answer. He told Michael the real money was in real estate and that he could buy a house twice the size of his current one if he became a real estate investor.

Michael told me that was the exact moment he realized the housing market was headed for a crash. He knew the bubble was going to burst and it wouldn’t be long. He saw the writing on the wall. When the everyday man starts telling you to invest in an industry, it’s time to get out of the market.

Still don’t believe me? Look what happened to gold. Gold has seen a steady rise in price since early 2000. It hit a new record of $500 an ounce in 2005. By 2008 it had reached an all-time high of $1,000 an ounce. In November of 2010 gold climbed above $1400 for the first time. It hits its highest peak ever in September of 2011, closing at $1921 an ounce. And then it dropped. It hit $1800 an ounce last October and dropped below $1600 in February of this year. As of Monday gold was trading around $1,380 an ounce.

Now no one could have predicted gold would drop this much or how much further it will go down but certainly the signs were there that it would. What signs you ask? Just watch TV at any time of the day to see them. For the past few years we’ve been watching commercials advertising gold bars and investments for gold play across every TV program night and day. When a hot market like gold starts being recognized as a savvy investment by the everyday man, a pullback is sure to follow. And it did.

It happened to the housing market. It happened to gold. And although I’m in no way predicting this I have seen a few signs that indicate we might be headed for a stock market dip.

I bet you think I’m crazy. The market has been on a tear since 2009. It just keeps going up and up. It’s gone from a low of 6,594 in 2009 to nearly 16,000 this year. The run up has been amazing and extremely profitable for investors. Those are not the reasons I’m worried about a stock market crash.

In January of this year more than $60 billion was injected into the stock market. Investors who were previously sitting on the sidelines have decided to give Wall Street a chance. Perhaps they were tired of earning 0.003 percent in their savings accounts or CD’s. Perhaps they’ve been kicking themselves for missing out on the huge run up that has occurred over the last four years. Whatever the reason, large numbers of investors are getting back into investing in the stock market.

That’s what scares me. It’s that everyone sees investing in the stock market as a way to make money. The everyday man has seen the hot investment option and is now trying to capitalize on it for themselves. If history is any indication we might be headed for a bear market and a correction in the markets.

The time to prepare for a market crash isn’t when it’s happening, it’s before. So I’ve put together my stock market survival guide. I intend to survive all market dips, crashes, pull backs and what not unscathed. And perhaps even profit a bit. Here’s how you can too:

Your first line of defense is to have a plan…your second is to stick to that plan. Hopefully you and your financial advisor worked out a retirement strategy. One that was created based upon the retirement lifestyle you hoped to achieve. Your strategy took into account the age you hope to retire at, your income needs and your risk tolerance.

Whatever course you charted for yourself was done with purpose. So don’t allow yourself to be blown off course now by the temptation of this or any market upswing. You can make nips and tucks here and there but do not make sweeping changes to your overall retirement investing plan.

Those investors that change their investment plans and strategies to the whims of the market often get caught with their pants around their ankles. For example look at what happened to those investors who jumped on the tech bandwagon a few years ago. Investors who sold out of some of their investments to free up money to invest in rapidly rising technology stocks were left with withered up portfolios in the dot com bust in the early 2000s.

I know it can be hard to resist investing in an industry, company or asset class that’s on fire. The media can make it seem like those stocks will keep climbing forever. But making investment decisions based on what’s hot right now can leave you open to more risk than you ever were comfortable with before. If the bubble bursts and you don’t have a diversified portfolio you can easily lose forty percent or more of your overall portfolio. That’s too much risk for retirement investors who have a nest egg to protect.

That’s not to say you shouldn’t add or shift your investments when you find something you feel is a good investment. Good investments emerge all the time. The trick is to maintain a balanced portfolio.

Whenever you add an investment or free up capital take a look at your overall portfolio. Over time the investments you picked will grow or shrink in size and that can leave your portfolio unbalanced.

If you noticed you are too far exposed in one particular area of securities then rebalance your portfolio to create a more diversified portfolio. Refer back to your original retirement plan on how to do this. Look at your risk tolerance and how long you have until retirement or until you will need to sell these investments to provide you with income in retirement.

You can easily fall prey to market volatility if you are relying on your stock market investments to pay off debt. You never want to put yourself in a situation in which you have to sell in order to manage your debts.

Managing debt is important for everyone, but it’s particularly important for those nearing or in retirement. These investors don’t have enough time to recover from market crashes and pullbacks. Anyone who has debt shouldn’t rely on money from their stock market investments to pay off their debts in the short term (less than 5 years away). In the Great Depression those that had sizeable debts were the first wave of people to get hung out to dry when the time came to pay up. Don’t leave yourself open to this kind of risk. Pay off your debts with money from employment or if you are already retirement from risk-free investments.

Another way to not leave yourself open to the inevitable ups and downs of the stock market is to maintain an emergency fund. Long time readers will know how often I recommend this financial strategy. It can protect you from sudden and unplanned expenses that pop up as well as any unplanned periods of unemployment. It can also be a safety net for stock market dives and crashes.  As well as give you cash to take advantage of these dips to buy cheaply priced equities.

Investing in the stock market is meant to be for the long term (ten years). If you need income or if the stock market goes into a steep sell-off you can quickly put yourself in a bad place. Keep your cool and maintain your finances by rejecting the media hype of market crashes by not selling off your investments. If you find yourself needing income that a pull back in the market no longer provides then an emergency fund will be there to see you through the downswings in the market. Those with cash set aside are able to roll with the punches better and are immune to any market volatility.

If you find yourself getting panicky anytime the market makes a downward move or the media proclaims a coming bear market, then your retirement portfolio has most likely taken a beating or two. That kind of alarmist behavior won’t do when it comes to investing. Instead prepare yourself for the inevitable-that at some point the market will pull back. It may not happen tomorrow or next month or next year, but it will happen at some point. Preparing yourself for normal fluctuations in the market can keep you from panicking when it happens.

Good luck!

Keeping Money in Your Pocket,

Nancy Patterson


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