5 Golden Rules to Help You Avoid a Stock Market Crash

Boy… is it easy to lose money in the stock market when it goes down! Why? Stocks fall 3 to 4 times faster than they rise. So you are likely to lose a lot faster, and as such get trigger shy into to thinking it will come back when you should have sold. And because we coax ourselves into thinking “we are in it for the long term,” we freeze up and let it happen. But here’s the rub, you don’t have to be invested in the stock market 100{5b0579ddad123e8826b0f99aaf2548fba6b6d6310808b95d99d67897c25a7935} of the time to be “in it for the long term.” We just have to know when to get into the market and when to sell.

Our biggest problem when it comes to investing

The problem for many begins when we give too much credence to the returns always being there for us, as well as make the assumption that we can be successful as long term investors if we just throw money at a mutual fund and hold on forever. Unfortunately, this attitude gets us into bad situations, and can easily be avoided with a little bit of knowledge.

To do this, we need to take a more active role with our investments, because, in the end, we are the only ones who genuinely care enough about whether we retire wealthy or not. You work too hard for your money to afford anything less.

Here are a few steps you can take next time:

1 – Educate yourself. Just because you didn’t go to Harvard or have a degree in finance, doesn’t mean you can’t learn how to invest. You can also either seek out advice from your discount broker, who has classes and webinars to suit your schedule, or subscribe to a monthly personal finance magazine, like Money, Kiplinger’s or Smart Money, or you pick up a copy of my guide and read this blog, as I try to help other learn how to invest and reveal investment strategies that can help you achieve your retirement goals. No matter where you get your information, the ultimate objective is to develop an investment plan; one that is more than just throwing money at the latest and greatest fund, and hoping it will grow.

2 – Learn when to get out. In prior posts, I talked about watching a simple volatility indicator, like the VIX, to let us know when to get out the market and when to get back in. Volatility is very important to learn in order for you to avoid downward markets. You see… as stocks move faster, their volatility goes up. And since stocks generally fall 3 to 4 times faster than they rise, the market’s volatility, as measured through the VIX indicator, rises when the stock market falls. When the VIX gets above a certain number, I sell. It’s that simple. And when it gets below a certain point, I get back in. It’s not perfect, but I avoid a great deal of market corrections and emotional headaches.

3 – Exchange Traded Funds (ETFs) should be a primary part of your portfolio allocation. You can’t afford junk fees and management fees from equity mutual funds that drain your portfolio over time, as 80{5b0579ddad123e8826b0f99aaf2548fba6b6d6310808b95d99d67897c25a7935} of them fail to beat the S+P 500 index. This could make a difference of a few hundred thousand dollars in your investing lifetime. Unless your mutual fund is beating the market after fees year after year, find an ETF with similar investment objective to your mutual find, and consider making some changes.

4 – Always use a stop program. Another benefit to using ETFs is that you can use a stop program that automatically gets you out at a set price or percentage. So if you are only willing to risk 5{5b0579ddad123e8826b0f99aaf2548fba6b6d6310808b95d99d67897c25a7935}, 7{5b0579ddad123e8826b0f99aaf2548fba6b6d6310808b95d99d67897c25a7935}, 10{5b0579ddad123e8826b0f99aaf2548fba6b6d6310808b95d99d67897c25a7935} or more of your money, all you have to do is to initiate a stop program (ask your broker how). That way, you can set it and forget it. Don’t let your emotions control how much you should lose. Remember, you can always get back in later.

5 – Don’t forget diversification. Our national debt is almost $10 trillion. What that means to you is as the government adds more debt, the dollar becomes weaker. As the dollar becomes weaker, your money is worth less. You can counter this by investing in overseas ETFs. But be careful. Look for markets that intend to grow more than they have in the past, and always use a stop program. Otherwise, markets can punish economies that intend to grow less in the future, no matter if it’s from 2{5b0579ddad123e8826b0f99aaf2548fba6b6d6310808b95d99d67897c25a7935} to 0{5b0579ddad123e8826b0f99aaf2548fba6b6d6310808b95d99d67897c25a7935} as in the case of the US, or from 10{5b0579ddad123e8826b0f99aaf2548fba6b6d6310808b95d99d67897c25a7935} to 7{5b0579ddad123e8826b0f99aaf2548fba6b6d6310808b95d99d67897c25a7935} as in the case of some higher growth economies.

If you are scared or frustrated from big investment losses, it is a sign that you need to have an investment approach about managing your money. It is not hard to get on a path to building and maintaining wealth. But it takes education, effort and action on your part. These 5 golden rules and some of my blog posts should help you get you started in the right direction.