As an investor, witnessing the stock market in free fall certainly inspires you to rethink your investing strategies, both short-term and long-term. Though no one can predict the ups and downs of the market with pinpoint accuracy, you may protect yourself — and your money — by taking preventive action. Preparing your portfolio to be as bear-proof as possible well ahead of a crash can mean the difference between surviving and thriving in a post-crash market.
When preparing your portfolio to survive a crash, it’s important to keep your ears open to a range of sources. In early 2007, Raghuram Rajan, chief economic adviser for the International Monetary Fund, and investor Jeremy Grantham both predicted the 2008 subprime-related market crash. Unfortunately, most financial experts dismissed their warnings. According to MSN Money, signs that may indicate a coming crash include overvaluation of stocks as compared to bonds and low cash levels in mutual funds. Also watch for large proportions of commercial traders “short selling” — borrowing securities and selling them with the hope of buying them back later at a better price. Short sellers essentially bet on a market decline.
Stay the Course
When faced with a tumbling market, your first instinct may be to withdraw and run away, but that may not be the best course of action. According to Money Morning, on average, missing just 1.0 percent of the market’s most bullish days resulted in an 12.94 percent lower annual return — from 4.86 percent to -7.08 percent. If your portfolio is based on sound companies and principles as opposed to hot trends or emotionally laden investments, it may be prudent to hang in there and let the market recover on its own time.
Outside the Box
You probably know that you should diversify your portfolio, as it’s never wise to put all of your eggs in a single basket. Some financial advisers suggest diversifying into commodities such as gold, silver or oil as a means of protecting your money in a crash. Commodity values aren’t as tied to the stock market and have the potential to increase in value even when stock prices are falling. However, others warn that investments in gold don’t necessarily offer lucrative long-term results. In fact, an article from the Wharton School at the University of Pennsylvania cites studies showing that $1 invested in gold in 1801 would have been worth only $1.95 in 2006, as opposed to a profit of more than $755,000 for an investment in the overall stock market. Consider commodities as short-term investments.
With a market decline comes opportunities. Take advantage of lower prices. Don’t be afraid to buy, but keep your options open: You may want to re-evaluate your portfolio weekly or even daily to make sure you’re in the most profitable position possible. Similarly, consider investing in inverse exchange-traded funds. These funds actually grow as the market declines. Most are tied to major market indexes, such as the Nasdaq, and some focus on specific markets, such as energy, consumer goods or the financial sector. When the market grows, drop the inverse ETFs and re-invest in normal stocks.
- MSN Money: A Market Crash in 2011? Count On It
- MSN Money: 3 Signs That a Stock Crash is Coming
- The Wall Street Journal: Fasten Your Seatbelts, It's Going to Be a Bumpy Year
- Money Morning: Investment Safety Strategies — Eight Ways to Survive a Stock Market Crash
- Wharton School: Gold May Glitter, but It Doesn't Stack up as a Long-term Investment
- Investopedia: Inverse ETF
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