How to Protect Your Assets From a Stock Market Crash
Imagine approaching retirement and watching your portfolio be cut in half. Maybe you don't have to imagine, because it happened to you in 2008. While there are no surefire ways to avoid a stock market crash, there are some things you can do to reduce the likelihood that you will suffer the consequences of one in the future. Here's how to protect your savings from a significant downturn in the financial markets.
1. Don't invest in the stock market. The best way to avoid a crash isn't to get involved in the stock market in the first place. However, you aren't likely to get a decent return without putting at least some of your money into equities. And few people can save enough to retire comfortably without the help of compounding investment returns. However, there are some relatively safe ways to invest without losing your money to a crash.
2. Play it safe with money market accounts. While money market accounts typically don't have a great return on investment, they can be a safe haven for your portfolio if you can't afford to take much risk. The good news is that money market accounts will usually provide better returns than a certificate of deposit and are easy to set up online.
3. Get a guaranteed return with annuities. If you want to avoid stock market volatility, still make a return and are willing to hand over a chunk of cash to an insurance company, an annuity will provide fixed payments for a set period of time or even the rest of your life. I usually don't recommend annuities, but sometimes fixed annuities can make sense. If you're looking for guaranteed returns, and don't want anything to do with the risk of the stock market, annuities might be a good option for you. For example, if you find a five-year fixed annuity paying 3 percent, at least you are able to offset inflation.
4. Get an insured high-yield savings account. There's nothing like an old-fashioned savings account. In the United States, many savings accounts are insured by the Federal Deposit Insurance Corporation or National Credit Union Administration up to $250,000. If you're looking for the best protection for your money, this is it. There are some great high-yield online savings accounts with this protection. While you may not make as much money as in the stock market, at least your funds will be safe. It's unfortunate that less volatile investment vehicles typically don't have great returns, but it's important to take advantage of accounts less prone to losses.
5. Invest with peer-to-peer lending websites. Peer-to-peer lending is a relatively new form of borrowing and lending where individuals lend money to each other for a profit. Peer-to-peer lending websites make it easy to invest your money in other people and track the status of your loans, and they offer pretty good rates of return. But you also take on the risk of whether the person you are lending money to will pay you back.
6. Diversify your portfolio. While equities make up an important component of the portfolio of most investors, it's seldom a good idea to have all of your wealth tied up in the stock market. Depending on your risk tolerance and proximity to retirement, remember to temper your risky investments with bond funds and even cash.
If you're afraid of a stock market crash, don't stuff cash under your mattress. It's important to keep at least some of your savings in the stock market to take advantage of the historic gains. For the rest of your savings, there are stock market alternatives that can yield a decent return with little risk.
Jeff Rose is a certified financial planner, U.S. combat veteran and the founder of GoodFinancialCents.com.