Can You Recover if the Stock Market Crashes?

The stock market is enjoying a crazy long record setting expansion.  By some measures, this is the longest bull market in the history of the United States.

If this fact makes you nervous, you are not alone.  No one wants their retirement savings at risk.

So, Will the Stock Market Crash?

Ha.  Thought you’d get an answer did you?

That would be nice wouldn’t it?  The reality is that no one really knows. And, it would be silly to make guesses.

Can You Recover if the Stock Market Crashes?

Instead of playing a guessing game about a stock market crash, a better idea might be to assess how well you might be able to recover if it does crash.

Whether or not your finances can easily weather an economic downturn will depend largely on how your money is invested, as well as how soon and how much you need to access any of it.

It might be useful to look at how long it took portfolios to recover in the last big downturn. In 2008/2009, the stock market plummeted around 50 percent.

The New York Times quotes analysis from Vanguard that suggests:

  • An investment portfolio evenly divided between stocks and bonds would have lost nearly 29 percent of its value in that time, but it would have taken only about a year to recover.
  • A portfolio that was 100 percent stocks — and lost about 55 percent — would have taken about three years to recoup its losses.

How Can You Protect Yourself Before a Crash?

You were born to win, but to be a winner, you must plan to win, prepare to win, and expect to win. – Zig Ziglar

A good plan violently executed now is better than a perfect plan executed next week. – George S. Patton

Failing to plan is planning to fail. – Alan Lakein

Are you getting the idea?  If you want your finances to stay secure if a stock market crash happens, you need to have a plan.

Here are a few ideas for a stock market crash plan:

#1: 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.  This plan can help you know how much money you need and when, how your assets are turned into income and more.  All this will inform your asset allocation and what to do if a crash happens.

The NewRetirement 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 Investor’s (AAII) and CanIRetireYet.

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

#2: Understand Your Risk Tolerance

Close your eyes.  Imagine how you would feel if you were told that the stock market is currently in free fall.

If the thought makes you feel sick to your stomach, then you may have too much exposure to stocks.

#3: Know that Stocks Are Useful to Retirees

Stocks are not kryptonite for retirees.

Stocks should be an important part of any retirement portfolio.  In fact, stocks are key to helping your retirement spending power keep pace with inflation.

The trick is in understanding how much of your portfolio should be allocated to stocks and how much in more conservative crash proof (or at least crash resistant) investment vehicles.

You need an asset allocation plan and you need to execute and maintain it.

#4: Maintain an Investment Policy Statement

You probably know that you need a well diversified asset allocation plan.

However, most people are not as familiar with the idea of an Investment Policy Statement (IPS).

An IPS is meant to define:

  • Investment goals
  • Strategies for achieving those objectives
  • A framework for making intelligent changes to your plan
  • Options for what to do if things don’t go as expected

A strong IPS can be an invaluable tool for helping you achieve your financial objectives and to stay the course when unpredictable things happen.

Want help with an IPS?  Let us connect you to a prescreened retirement financial advisor.

#5: Know What You’ll Do if a Crash Happens

Crashes happen when something triggers investors to sell stocks and the selling snowballs.

A crash is an emotional and stressful event.

To protect yourself and your money, you want to have a rational, well documented plan in place.  You want to know — in advance — exactly what you will do if a crash happens.

The hardest part of a stock market crash?  It might be sticking to your plan and not selling in a panic.

Panic selling can be a disaster to your retirement security.  Remember, if you sell all your stocks at a low, you can’t recover.  If you hold your stocks, you will likely regain your positions.

If you buy, you might end up ahead.

#6: Consider Selling Now

If you look at your asset allocation now, is it still in line with your original intentions?

If you want to be 30% in stocks, but haven’t rebalanced in some time, you might find that you are currently 35% in stocks.

To protect your gains, you may consider selling now and returning to your original asset allocation targets.

#7: Make Sure You Have Access to Cash for Short and Mid Term Spending Needs

If a stock market crash happens, and you are emotionally prepared to ride it out, you don’t want to need to sell.

You want to make sure that you have the finances in place to cover you through the recovery.

So, Can You Recover?

Of course you can.  It all depends on how well you’ve planned.

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