During The Next Market Crash, Plan Not To Panic

The dark shadows of 2008 still remain in 2010 and are having a deep impact on the way people are investing (or rather non-investing) today. Most investors did not expect and certainly didn't plan for a stock market drop of almost 40%. As painful as this experience was for many people, it's already in the history books and what's more important now is to learn something valuable from the experience. In fact, if your investment horizon is the next 10 or 20 years, this lesson could change your life (or at least your retirement!).

Here's what I think you should take away from the experience. An investment strategy where 100% of your assets are invested in the stock market (even with no leverage/margin account, etc) can result in a drop of 40% or more in your net worth in any particular year (duh, you're probably thinking). But that's so important to know (and plan for!). If you can't live with a drop of that size, you can't put all your money in the market. You'll likely panic out or be forced to sell at exactly the wrong time. In fact, if we start with the premise that you can't handle a 40% drop, then putting 100% of your money in the market is a strategy that is almost guaranteed to fail at some inopportune time down the road!

Source: Magic Formula Investing

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