How to Prepare Yourself for Stock Market Bubbles and Crashes - dummies

How to Prepare Yourself for Stock Market Bubbles and Crashes

Stock market bubbles and crashes are a fact of life for investors. One of the most famous bubbles of the last century occurred in the so-called Roaring Twenties, which came to a startling end with the stock market crash of 1929. The overindulgence of credit and spending combined with wild speculation in the stock market led to the Great Depression, which lasted about ten years. Will the U.S. experience another depression like the Great Depression? Who knows, but you can prepare yourself just in case. Here’s how to position yourself well:

  • Steer clear of consumer debt. In the Great Depression, those in debt got hammered when it came time to pay up.

  • Pay your mortgage off as soon as possible. Minimizing your mortgage debt is also a smart thing to do. Having too much debt — of any kind — puts you in jeopardy if times get really tough and you lose your income, run out of savings, and can’t borrow more money.

  • Save for emergencies. Those with cash set aside are able to roll with the punches.

  • Take advantage of future investment opportunities. Some people took advantage of lucrative investment opportunities — believe it or not, some people actually prospered during the Great Depression.

  • Develop a broad skill set. Jobs were extremely hard to come by during the Depression, and those with a wide range of skills had an easier time finding employment.

  • Maintain a diversified portfolio. Investors who were seriously injured in the tech wreck had most of their money in dot-com and technology stocks. If you have a diversified portfolio and remain invested for the long term, don’t panic when a bubble bursts. Stay the course and let the market work things out.

  • Avoid the next hot investment. Resist the urge to get caught up in the irrational exuberance of new technology.