Are You Ready for the Next Meltdown?

With the fate of the European economy hanging on the balance, we may be on the verge of another extended downturn for the stock market. But instead of making the mistake that many investors made during the last financial crisis, you need to realize that with crisis comes opportunity -- and you don't want to miss out on what could actually be your best chance to make amazing profits.

Remembering 2008
Today's crisis of confidence in Europe brings back plenty of memories about what the U.S. went through just a few short years ago. With bank failures rocking the very foundations of the U.S. economy to the core, the market meltdown of 2008 and early 2009 challenged fundamental assumptions about the way the financial system worked and led to huge attempts at reform that we're all still struggling to complete today.

But along the way, the crisis gave investors some amazing opportunities for profit. Many of the financial stocks at the epicenter of the crisis lost nearly all their value, but most of them bounced back sharply, producing big gains for investors who were courageous enough to jump in when no one else would. Even today, JPMorgan Chase (NYS: JPM) and Wells Fargo (NYS: WFC) trade well above where they did in early 2009. Similarly, cash-strapped companies like Ford (NYS: F) and Las Vegas Sands (NYS: LVS) were priced for failure, but those who bet on their survival were richly rewarded.

This too shall pass
Europe's problems are of a different flavor, obviously. The prospect of national governments facing financial insolvency is another order of magnitude larger than the potential private bank failures that threatened the U.S. three years ago. Still, you have to ask yourself: will even as huge a step as the abandonment of the euro currency cause so much chaos that business activity comes to a screeching halt entirely? Such huge consequences are unlikely. Rather, just as the U.S. went back to business after the financial crisis, so too will Europe likely emerge without huge disruptions to their overall economic activity.

That doesn't mean that hard-hit companies like banking institutions National Bank of Greece (NYS: NBG) or Bank of Ireland (NYS: IRE) will magically return to their pre-crisis levels. But with investors punishing companies across the European continent as if businesses are going to stop functioning, there are already attractive bargains available -- and more could emerge as the problems continue.

How to get ready
In order to make the most of this possible meltdown, you should be preparing right now. Here are a few things to keep in mind:

  • Cash is king. You don't want to go overboard trying to time the market, but holding at least some money aside when stock valuations are relatively high gives you more firepower when bargains come. Because downturns can last longer and go further than you'd ever think possible, don't be in a hurry to deploy all your spare cash right away.

  • In any market plunge, some investments get hammered when they don't deserve it. For instance, during 2008's collapse, commodities like gold and silver suffered huge losses just when their potential value as a hedge against government irresponsibility was soaring. But after the crisis ended, reality set in -- and metals started soaring again.

  • Hedge your bets. As we've seen, the whole world is holding its breath about Europe. Picking individual stocks may maximize your returns, but it also creates risk. A broader-based investment like European ETF like iShares S&P Europe 350 Index (ASE: IEV) could help cushion the blow against any company-specific problems.

  • As one of my favorite authors once said, fear is the mindkiller. If you're going to invest in stocks, you always have to be ready for tough periods like this. Rough patches separate good investors from great ones, and how you handle them can define your success or failure for years to come.

Your make-or-break chance
It's never easy to stick with your investing strategy when the bad news never seems to stop coming. But if you handle situations like this the right way, you'll eventually see them as rare opportunities that give you your best chance to reach all your financial goals. The hardest thing to do is to shift your mind-set away the pervasive doom and gloom and keep your eye on the ball. But if you can, you'll be ready for meltdowns whenever they come.

Being ready for big opportunities can help you retire richer, but you still need all the help you can get. Read the Fool's newest free special report, "The Shocking Can't-Miss Truth About Your Retirement," and learn the tips you need to succeed no matter what the market throws at you.

At the time thisarticle was published Fool contributor Dan Caplinger thinks he's ready for whatever the market throws at him. He doesn't own shares of the stocks mentioned in this article. The Motley Fool owns shares of JPMorgan Chase, Ford, and Wells Fargo, and has created a covered strangle position on Wells Fargo. Motley Fool newsletter services have recommended buying shares of Ford. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool's disclosure policy won't melt down on you.

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