Are You Prepared for a Major Market Crash?

May 19, 2010 by  
Filed under Investing

The market has been making me uncomfortable. Perhaps “more uncomfortable than usual” is a better description. I’m feeling more like a gambler than an investor. By that I mean that my feelings about positive market returns are closer to “hope” than they are expectations.  That’s not good. Feelings like I have about the market are more akin to being a lottery player or speculator.

What should one do about market uncertainty and a failure of logic or rational expectation?

At this point, my concerns have shifted more toward damage control than fine tuning for better returns. I, like some others with more expertise than I have, am concerned about another market crash.

Imagine if you were heavily invested in the Euro now. It has fallen to four year lows. It’s near term prospects are not good.

How can a damaged Euro affect us here in the U.S.? For an economist’s answer to that question, read this piece on the Eurozone Blues by Peter Navarro. If you are a serious investor, read the entire piece. If you are a lazy “hope for the best” investor, read this paragraph from the article:

It is easier to paint a bearish global scenario from the euro collapse than a bullish one. The bearish scenario is this: Europe stagnates as “Le Tarpe” fails because of political pressures that were not present in the U.S., i.e., while the U.S. could make demands on Citi and AIG et al, the Eurozone bigwigs can’t bend Greece and Portugal and Spain to their will. China implodes on a combination of collapsing real estate and stock market bubbles coupled with a fall in exports to the Europe. The U.S. continues to be leached by Chinese mercantilism while it loses its export growth in Europe while internally states like California and Illinois undertake contractionary measures that ripple across the nation.

What about the rallies we have experienced, you might ask?

Have you heard the term “sucker’s rally?”

Read this article – ‘Major Crash’ Likely If Stocks Break May 7 Lows – and then ask yourself:

Am I prepared for a major crash?

You had better be prepared.

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5 Responses to “Are You Prepared for a Major Market Crash?”
  1. Rob Bennett says:

    I’m prepared for a crash in a financial sense.

    I don’t know if it is possible to be prepared for the political fallout that will come with another crash. There were people talking about a Second Great Depression after the first crash. My guess is that that talk will be much more serious after the next one.

    The good news is that, if we survive the next crash, a lot of the crazy ideas about investing that have become dominant in recent decades will be buried twenty feet in the ground where they can do no further harm to humans and other living things. I am preparing not only for a second crash but also for The Golden Age of Middle-Class Investing, which I expect to see coming in the days following the next crash.


  2. MasterPo says:

    Is anyone every really prepared?

    I don’t mean that in shrug-your-shoulders-and-walk-away tone.

    I mean that you can’t really be prepared for the unknown. What exactly is a “major market crash”?

    A drop of 30%? 40%? 50%?

    And how long does that drop last?

    A few months?
    A year?
    A decade?

    My point is that in order to really prepare you need some kind of parameters. If you suspect a 30% drop that will mostly recover with in 12 months weathering that storm will be a lot different than a 50% drop that may take a decade or more to just get back to the starting point.

    However, with that said, I too have ponder the very real concern of a major market crash soon (on “expert” opinion I recently read called for a crash anywhere from 2 days to 2 weeks time!) – in economic, political and social terms.

    As far as finances go, I have been a more aggressive buyer of gold in spite of the price run up. Gold has value regardless of what happens in an economy. I don’t know how to turn gold into say food or fuel if the economy collapses but I do know that gold will hold value better than paper dollars.

    I also have been trying to sock away as much cash as possible, both in FDIC banks and literally at home in the event banks are forced closed for some period of time.

    Then there’s also the issue of food, fuel, medicine, even clothing and yes even personal protection if all hell breaks loose.

    Use your imagination on those subjects.

  3. MasterPo says:

    ps- Not to go (too far) off topic, did you happen to catch the Glenn Beck show today?

    Beck offered a very interesting opinion on why TIPS bonds (a favorite of yours I know) are BAD for the economy right now and are actually helping to artificially keep gold and other commodity prices DOWN.

    • MAsterPo – I did not see Beck’s show. I wonder what his logic is about TIPS. I suppose that it’s because TIPS present a low risk option for providing inflation protection in long term portfolio. Conventional wisdom has been to use precious metals and commodities for this purpose. With the TIPS option, the market value of commodities investments are depressed. My answer as a TIPS investor is: So what if my gain is your loss. It happens all the time.

  4. MasterPo says:

    Partly right.

    Beck’s thesis is the gov learned from the inflation of the 80’s how to “monetize inflation” by creating TIPS. Money that would have come out of Treasuries and cash and go into commodities like gold now (at least in part) go into TIPS.

    His point was that such action is:

    1) Artificially keeping the price of gold low. Not a bad thing per se but it gives a fale image of the concerns from the market and the world.

    2) Real, tangable protection against inflation and general unknown that gold represents has been replaced by paper. Give the economic and political risks you’re trading a physical asset for a paper one.

    On the latter I agree completely.

    Nations and currencies come and go.
    Gold surivives.

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