How to Survive a Stock Market Crash

Do you know the proverb "After rain comes sunshine"? As the proverb indicates, the sun will always appear once the rain stops; just like the weather, the stock market also goes through cycles. Stocks are always rising and dropping and a market crash can happen several times during your life. If you relate the stocks to this proverb you will understand the value of stocks will rise again after a market crash.

Understanding how to survive a market crash is the basics of a good investment strategy. This includes diversifying your stocks and buying on a regular basis. If you have a specific plan when you buy for a certain amount in stocks or mutual funds whether you invest every month or once a year you will notice that sometimes you buy on a low price and other times on a high price. Spreading your investments out is the best way to survive a market crash because stocks are investments for the long term.

A market crash also gives a lot of opportunities to invest in stocks. This time can be a great time to invest in 401 (K) plans or pension funds because you can buy more shares for the same money and this will give you more profit on the long term. You can better limit your investments in these plans in times when the shares are always rising and are reaching a value which can be considered as "overvalued". Losing money never feels good but after a period of dropping or a market crash the value of the shares will rise again.

Almost everyone has heard of the greatest crash in history in 1929. The Wall Street stock market crash took place on the 29th of October 1929. Economists considered investing in stocks as a safe investment and many people were buying shares. The value of the shares increased terribly fast and could not be conform to the growth of the world economy. During the period of 1921 until 1929 the Dow Jones; which you can consider as the indicator of the world economy, increased from 60 to 400. You will certainly understand the stock market was overheated and many people became rich during this period.

The Fed took several actions by raising the interest rates but most of the investors didn't want to listen to these signals and kept buying. The consequence was "the Great Depression" after this crash. Many people didn't have enough money to survive anymore because the greatest part of their money was invested in the stock market and this financial disaster which took place ruined them financially.

A good example of surviving such stock market crash is the decision that some great investors like by John F Kennedy's father took before the crash. They paid attention on the signals of the Federal Reserve and saw that the market was overheated and sold their stocks before. Of course it is not always easy to know if a market crash will happen in the near future but selling a part of your investment in stocks if the market is overvalued is often a good decision.

Also some political reasons like a war which is approaching (by example the war of Iraq) is a good reason to sell stocks. People who took this decision and invested back when the stock market was starting to rise have reached a good return during several years.

Surviving a market crash is not difficult but some knowledge of the stock market is necessary. Investing on a regularly basis is the key to success and a stock market crash will never have a dramatic influence on the long term. The only important discussion can be: do I invest in stocks or mutual funds which invest in stocks. The answer is a little bit personal and depends on the amount of the money you can afford to use for investments. Maybe investing in stocks can give you a higher return if you pick the right stocks but if you want to limit the risk of some bankrupts mutual funds are a better choice.

Following the basics of a good investment strategy is the key to survive every market crash!