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Posted on 6 July 2012 | 3,552 views

Prepare for the Next Stock Market Crash

When it comes to investing in the stock market the first thing that comes into our mind is what will happen to our invested capital if the stock market crashes again like it had crashed in 2008-2009.

Would we lose all of our invested capital or would our portfolio perform when the stock market is falling?

If the thought of losing half your money temporarily is frightening, hold fewer stocks. A $10,000 investment half in stocks and half in bonds dipped to $7,800 in the 2008-2009 stock market crash. But three years after the worst point, an investor had $12,900.

Before the 2008-2009 stock market crash, many investors were blindly investing in equity markets. More than 90% of their portfolio was in equity stocks or equity mutual funds.

After the stock market crash of 2008-2009 — millions of investors suffered great losses and gave back their profits — all because they had no plan or strategy for managing their assets.

Here are some Investment Strategies which may help your portfolio sustain the next big market crash like the one we had in 2008-2009.

Do not put all of Your eggs in one Basket

If you diversify your portfolio, your overall portfolio performance should deviate less because losses from some investments are offset by gains in others.

Invest in Gold

The value of gold has always covered the price of inflation, making gold one of the few investments able to protect against currency depreciation.

Follow Asset Allocation

Asset allocation is dividing your portfolio among stocks, bonds, real estate, cash, and other investments according to your risk profile. Historically, it’s rare that all asset classes lose money at the same time — spreading your money across investments will help lower the volatility of your portfolio.

Re-balance Your Portfolio Regularly

There are two important reasons why you should re-balance your portfolio regularly — your age and your investment profile. The returns of your investments are different and you need to re-balance for keeping your age and risk profile in mind so as to maintain the basic asset allocation intact.

Maintain an Adequate Cash Level

It is always advisable to have some portion of your investment in liquid savings — cash, bank accounts and Treasury bonds comes into our mind as most popular options. These allow you to have instant liquidity and access to your money when you need it.

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