9 Tips for Protecting Your Investments from a Stock Market Crash

A stock market crash will happen. It is never a question if, it is a matter of when and for how long. So, you really need to think about how to protect your investments – particularly your retirement investments.

You probably remember the financial crisis that started around 2008. It severely impacted the retirement security of many people around retirement age.  And, how did you feel in the wild ups and downs of 2015 when gains and losses approached those experienced in 2008 and the Great Depression in the 1930s?

And, what is going to happen to the stock markets this year when the world feels more unpredictable than ever?  Will your retirement portfolio be up or down tomorrow?  What about the next day?

We all survived 2008 and 2015.  But it is good to be prepared. Knowing how to protect your retirement plan is important for your peace of mind and for your financial health.

Here are 9 tips for retirement planning and weathering financial turmoil:

1. Periods of Stock Market Growth Can Last a Long Time

Marc Jimenez is the managing principal at CAM Investor Solutions.  While he acknowledges that volatility WILL happen, he points out that we could easily enjoy more gains for a significant period of time:

“The bull market of the 1950s and ’60s lasted 19 years and saw the S&P gain 413%. The bull market of the 1980s and ’90s lasted 18 years (October ’87 notwithstanding) and saw the S&P gain a whopping 665%. While those are the two longest and largest bull markets of the past century, it nonetheless shows that stocks can move much higher and for much longer than conventional wisdom suggests.”

2. Prepare Yourself Now to Take a Deep Breath and Ride it Out if a Market Crash Happens

Watching the stock market close nearly 600 points down is never going to be fun.  But the lesson is almost always going to be to wait it out. It has always recovered. Do NOT to sell everything or avoid stocks all together.

In fact, those who remain calm and stay the course with their investments during downturns are often rewarded with a big bounce sometime later.

Unfortunately, many retail investors (regular people who invest their money themselves) get nervous and sell at the market bottom and don’t re-invest, missing the market recovery.  This is the single biggest reason that retail investors typically lag overall market performance.

We can not predict what will happen, but acting calmly is bound to serve you well.  Do not panic is the first rule of a crash proofing your retirement plan.

3. Don’t Abandon Stocks Altogether: Prepare by Diversifying

Many people think that crash proofing your retirement plan means that none of your money should be invested in the stock market.

Avoiding stocks in retirement is not usually the best strategy.  Stocks can do a good job of helping your income and assets grow and stay ahead of inflation.

However, you don’t want to “keep all of your eggs in one basket.” You want to figure out a diversified portfolio of an array of financial vehicles.

Consider bonds, cash, real estate, derivatives, life insurance, annuities, precious metals and other types of investments.

You also want diversified holdings within each asset class.  For example, for stocks you would not want only large oil and gas companies.  Instead, you might want a mix of small and large, international and domestic companies in different fields.

Not sure about the right mix of investments for your needs?  Consider working with a pre-screened and highly certified fiduciary financial advisor.

4. Try a Bucket Approach – Don’t Invest Money You’ll Need Within the Next Few Years in Stocks

The bucket approach is advocated by many retirement experts.

• In one bucket you maintain liquid assets — cash or other low risk investments in an amount to fund 1-3 years-worth of your retirement withdrawal needs. The reason for this bucket is to avoid the need to liquidate equities during periods when the stock market is down, realizing steep losses.
• The second bucket might contain up to five years-worth of living expenses and be invested in a combination of income producing investments and some that offer moderate growth opportunities.
• The third and most aggressive bucket will be predominately invested in stocks and more aggressive fixed and alternative type of investments. This bucket is designed for growth and to help you avoid running out of money by being too conservative.

The actual percentage allocation to each bucket will vary by household and how much you need and want to spend over what time period.

Try using the Boldin retirement planning calculator to help you figure out how much savings you need in different buckets.  This award winning tool can also help you visualize what your retirement budget will be, how much income you will rely on from savings and investments over the course of your retirement and much more.

5. Believe in the Fundamentals of the Companies You Own

Warren Buffet is famous for saying: “What an investor needs is the ability to correctly evaluate selected businesses. Note that word “selected”: You don’t have to be an expert on every company, or even many. You only have to be able to evaluate companies within your circle of competence. The size of that circle is not very important; knowing its boundaries, however, is vital.”

It is a good idea to know something about the companies whose stock you own and to really believe in them.  You will be less likely to panic and sell in a major downturn if you actually understand what the company does and know enough about the industry to project whether or not there will be a market for whatever the company makes in the future.

6. Guarantee What You Really Really REALLY Need

Annuities can be a great way for those in or near retirement to stabilize a portion of their income. Some feel this is another leg on the retirement income stool along with Social Security, pensions and your various investment accounts.

You probably don’t want all of your savings in an annuity. However, you might want to consider purchasing an annuity to guarantee income that you could not live without.

• If you are considering any annuity you really need to shop around. Beyond what is offered by those actively trying to sell you an annuity, look at low cost, no-load options like those offered by Vanguard and others.
• It is appropriate to ask how much you would receive in monthly income from several carriers and compare the answers. You will find that the payments may differ widely for the same annutization option.
• Another key question is how much of your nest egg do you want to commit to an annuity?

Explore more of the pros and cons of annuities or get an instant annuity estimate.  Find out how much income you could buy and see various options.

You might also want to explore other ways to produce retirement income.

7. If the Crash Happens, Consider Jumping In

If the crash happens, Jimenez wants you to consider if it is a buying opportunity and to be really ready to jump.

He says, “There is a misguided belief among many investors that they will happily jump back into the stock market once a significant downturn has occurred. “Once we get a 20% downturn, I’ll invest,” goes the thinking.”

He continues: “But such downturns only occur when fear has gripped the market and all the news headlines are obsessed with how far the market has fallen and how much farther it will go. Instead of feeling encouraged that stocks are a good buy, investors become more cautious, fearing they will put money into stocks only to see the market continue to fall. So instead they continue to sit on the sidelines, waiting until things “calm down.”

In reality, however, stocks typically soar back upward well before the crisis that provoked the selloff has run its course. The market recovery from the 2008-09 financial crisis illustrates this vividly.

Despite assurances from the pundits that investors should not expect a v-shaped recovery, stocks did exactly that. From the market low in March 2009, the Dow Jones index gained 30% in the span of just three months. By the end of the year it was up more than 60% from its low point. All of this occurred despite fear continuing to grip the market and the widespread belief that stocks were experiencing a false recovery and would fall below their March lows in short order. Investors who were still waiting for the “all clear” signal to get back into stocks instead saw stocks leave them in the dust.

8. Understand Ways to Bridge Your Finances if You Experience a Loss

If you experience losses in retirement investments, you are not necessarily in the poor house, especially if you consider alternate sources of wealth before selling stocks that are down.

Downsizing to release your home equity or going back to work – even if just part time – are pretty easy ways to bridge your financial needs while the stock market recovers.

9. No Matter What Happens, Create and Maintain a Detailed Overall Retirement Plan

You’ll be much better off in a market crash if you have already created a highly detailed and completely personalized retirement plan that can easily be updated when things change.

If you have a plan that is easy to update, then during a crash you can quickly run different scenarios and really assess the impact to your near- and long-term financial health.

The Boldin retirement planner is one of the the most comprehensive and powerful tools available.  Forbes Magazine calls the system “a new approach to retirement planning” and it was named a best retirement calculator by the American Association of Individual Investors (AAII) and CanIRetireYet.

This system makes it easy to run infinite what if scenarios at any time.