Stock Market Crash - Are You Prepared?

Anyone who bought stocks in mid-1929 and held onto them saw most of his adult life pass by before getting back to even. " -Richard M. Salsman*

No one wants to think about a stock market crash of 1929 happening again today. A rare article or report will appear and the news media will pass on the story believing a crash is as likely as Richard Branson building his hotel on the moon. The reality is that stock markets do crash, in 1929, in 1987 and sometime in 20??

One thing that is certain about a crash is that people are never prepared for it. We've been lulled into a belief system that stocks go up, and stocks go down and over time you simply buy and hold and earn a return that allows your money to grow on average at 8 percent. I recently spoke with a stock expert who said most of his clients are in their 60s and invested in conservative investment portfolios. When I asked further he admitted that many hold 50 to 60 percent of their monies in equities, hardly conservative when a major correction occurs.

There are some things you can do to prepare. First, take a look collectively at your entire financial picture. If suddenly your 401K and stock investments were slashed by 40 percent, could you still remain in your home, keep your car, pay for health insurance? If not, you might consider moving a portion of your current assets held in equities to more stable accounts such a jumbo cds in FDIC insured institutions. There are also money market accounts that can return 4 or even 5 percent with large account balances.

Second, take control of your financial education. Rich Dad Prophecy written by Robert Kiyosaki is an insigthful book that discusses a number of signs that point to a major correction. Kiyosaki sites the aging baby boomers will be pulling huge amounts of cash out of the market in the next decade and this could easily spur a major crash. He lists a number of other economic indicators that could bring the bull market tumbling down. If your risk tolerance for stocks change after you become more educated, then work with your financial provider to make changes and diversify your stock holdings to safer investments that would be less sensitive to a crash. A conservative portfolio would limit stocks to 15 to 20 percent holdings. A stock correction would be much more traumatic to portfolios with 60 to 70 percent holdings in equities. Finding out your percentage in equities is critical so you can make adjustments.

Finally, take charge of your finances. Remember that the money in your 401K, your IRA, your pension and retirement accounts is money that you have earned through your own blood, sweat and tears. You can roll many of these investments into self-directed accounts. Financial advisors can be very helpful but some can also be quite pushy. They may throw a lot of stats at you and tell you to relax, that the money tied up in stocks is fine. Just remember, many financial advisors probably said the same thing to their clients in 1928. If you can sleep well at night and know a large portion of your money is safe and earning a conservative return, then that really will be money in the bank.

*
Salsman, Richard M. "The Cause and Consequences of the Great Depression, Part 1: What Made the Roaring '20s Roar" in The Intellectual Activist, ISSN 0730-2355, June, 2004, p. 16. Emphasis original.

Tonja Steel is a free lance writer in Las Vegas. She writes on subjects of alternative health and conservative wealth.