May 12th, 2010
How To Prepare For A Stock Market Meltdown
It was an episode as close to Armageddon as Wall Street can get: traders watched in shock last Thursday as the Dow Jones industrial average plummeted nearly 1,000 points and cut the value of all stocks by $1 trillion.
It was the biggest intraday point drop in Dow history. Some blame the growing debt crisis in Greece, a technical computer glitch, a mistyped trade, or maybe all three factors combined for the 20 minute panic that threatened a stock market collapse. But by the end of the day, the Dow Jones was only off about 350 points and closed at a miraculous 10,520.32, leaving traders’ heads spinning.
The sudden selling and the brief meltdown eerily reminiscent to the late 2008 collapse of Lehman Brothers, AIG, Fannie Mae, and Freddie Mac reminded consumers how vulnerable this economy remains, even with improving unemployment numbers and more confident consumer spending. As CNNMoney puts it, we “will not have financial wiggle room to address future economic weakness.”
While the federal government scrambles to handle its fiscal crisis, take your own precautions to prepare for another possible Armageddon knocking on our economy’s door.
- Invest in stable, solid stocks. Eschew high-risk stocks and be sure to invest in some stable stocks, like consumer staple and discretionary stocks from companies like Procter & Gamble and Mattel, that have established reputation, longer-term horizons, and stable earnings. The Street website suggests that staple and discretionary stocks should comprise 20% of one’s portfolio.
- Diversify your investments. Don’t put all your eggs in one basket and diversify your investments across different companies, industries, countries and asset classes. You’ll have a smoother ride when rolling with the ups and downs of the stock market because diversifying allows your investment performance to fluctuate less and offsets losses in some investments thanks to gains in others. One site suggests pursuing a diversified strategy with 3 types of assets: stocks for growth, bonds for income, and money market securities for safety and liquidity.
- Have more than one stream of income. Multiple streams of income offers broader financial security in the case of crisis. Should you lose your main job, you’ll still have money trickling in via a sideline job, profitable hobby, or freelance work that will tide you down until becoming full-time employed again. You won’t have to tap into your savings or retirement nest egg as much. Plus, you’ll be earning extra money to put towards an emergency fund, investments, or other valuable assets.
- An emergency fund! We’ve emphasized the importance of emergency funds so much that we wrote an entire article about how to build one. Don’t get caught off-guard when financial emergencies happen—have an emergency fund to back you up that can last you 3 to 6 months of your normal living expenses.
- A killer credit score. Build and maintain a killer credit score and, no matter what the economic conditions, you’ll be getting the best interest rates, credit card offers, and loan terms. A few percentage points difference on a bank loan or mortgage saves you hundreds or thousands of dollars over the life of the loan.
The next stock market meltdown doesn’t have to deplete your investments or ruin your financial future; always be fiscally responsible about where you put your money and how you manage your finances.
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And never start believing there is some 100% safe investment – there is not! Many believed real estate was and now… The same for gold. If you bought for $400, you are ok, but if you invested just yesterday for some $1200, you may be surprised, badly surprised. Maybe the only 100% safe investment is your education, experience and skills.