Two Ways to Protect Yourself in a Market Downturn

Those of you who are invested in the stock market know that it's been on a wild climb up for quite some time now. Which begs the question -- how do you protect yourself against a potential (and probably inevitable) market downturn. Here are two suggestions from Money on how to minimize the impact of a market decline:

• The first is to practice asset allocation, which is a fancy way of saying spread your money among different types of assets.

• The second way you can protect yourself from the ups and downs of the stock market is to invest your money as you get it rather than hoarding it and trying to figure out the best time to put it into the market. This technique, by the way, is what makes 401(k)s such a great way to invest for retirement (aside from the tax benefits).

Of course, these don't guarantee you 100% protection and it's likely you will lose money if the market tanks. But you won't lose as much as people who haven't allocated their assets among different types of investments or those who just dropped a lump-sum in the market (for instance, the questioner in the piece held back $100,000 the past year since he thought the market was going to drop and he lost the chance to earn 15% on his money -- if he puts it in the market now in stock investments only, he'll really be in tough shape if it drops.)

My net worth is tied to the market for good or for bad. Lately, it's been great. Then again, if it tanks, I'll tank too. That said, my net worth has averaged a 16% annual increase for well over a decade now -- which includes the Internet crash and the associated fallout. Besides, if the market does fall, it will just give me a chance to buy more index fund shares at bargain prices. ;-)

Comments

[Edmund]

Not enough time is devoted on the math behind the reasoning for asset allocation.

There is certainly lack of emphasis on how to turn the level of risk that you are comfortable with into the proper asset allocation level.

[Blaine Moore (First Time Home Owner)]

I'm not worried about the market tanking, since I'd just load up on the indexes while they are low.

[John]

I'd say don't have any money in stocks or stock mutual funds that you plan on using within the next five years. That way, you won't have a nice nest egg built up for, say, a downpayment only to see it slashed in value by a sudden market panic or unexpected, prolonged bear market.

[Wealth Building Lessons]

16% for a decade - thats pretty impressive

would you like to share what your asset allocation is?

[FMF]

WBL --

Just so we're clear, I said my NET WORTH has been averaging a 16% annual increase for a decade, not my INVESTMENTS. My net worth has been growing though a combination of saving (from my salary) as well as the growth of my investments.

That said, I'm almost entirely in stocks as I have a very long (25 years at this point) time horizon.