What Happens If The Stock Market Crashes? Is Your Money Safe??

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There are way too many people in this world that blindly contribute to their 401k and then pray that it’ll grow into something that they can retire on. Does this sound like a good plan to you? What happens if the stock market crashes? Do you think your 401k money (that’s invested in the stock market…) is safe?

What Happens If The Stock Market Crashes? Is Your Money Safe?

what happens if the stock market crashesThe short answer is…. of course not. No invested money is guaranteed safety. If you are invested heavily in your 401k and the overall stock market tanks, you’re headed down with the ship.

To show you what I mean, let’s take a look at the market crash of 2008.

The average 401k account balance was $75,791 in 2006, then $78,411 in 2007, and then…..OUCH…. just $56,030 in 2008. In one year the average 401k balance went down by nearly 30%! Like I said, down with the ship!

If you remember, this was about the time that people were getting interviewed with tears in their eyes, “I don’t know if I’ll ever be able to retire!”

The problem wasn’t necessarily that the market tanked, but it’s because they had all their eggs in that one basket! Now that’s just foolish!

What If You Have Time Before Retirement?

Warren Buffett gave a fantastic analogy over a decade ago. Here’s my paraphrase:

You absolutely love buying and eating hamburgers. On average, you find yourself buying at least 2 hamburgers every single day. What if the price of hamburgers started to fall? Would you be upset? Or delighted?

You probably caught on by now, but let me spell out what good ‘ol Warren was trying to say. Hamburgers are like shares of stock. Would you like to pay a lot of money for each share? Or would you enjoy it more if the prices went down?

When the stock market plummets and we’re all 20 years or more away from retirement, we should all celebrate and buy even more! In fact, during the next stock market crash, you should throw a party! (FYI, people might think you’re nuts because they can’t grasp this simple concept).

Check out how quickly 401k’s bounced back from the 2008 dive:

what happens if the stock market crashes

To complete Buffett’s analogy…

After eating all those hamburgers, you become somewhat of a hamburger aficionado and decide to open up your own restaurant! Now, instead of being the consumer, you’re the owner! On an average day, you sell 200 hamburgers. Now what would you rather see? The price of hamburgers go up? Or down?

Up of course!

The more people pay for your hamburgers, the more money you make!

The same is true when you’re invested in the stock market. In a perfect world, shares of stock would be low and unchanged for 40 years while we’re buying them up. Then suddenly, when we’re done buying, all the shares would skyrocket!

But How Should We Diversify?

The only problem about buying low and selling high is we never know what it’s going to be. Maybe it’s not hamburgers that will jump in value when we become the owner of that restaurant. Maybe it’s fish. Or snail. Or maybe cereal. Who knows?

This is the reason for diversification. Since absolutely no one knows which stocks are going up and which are going down (no, not even Jim Kramer can predict the future of the market), we’re all taught to diversify. The only problem is, many of us have no idea how.

We think that if we invest in mutual funds and index funds, we’re way more safe than if we would have invested in IBM or Apple. Sure, it helps some, but guess what? All of your money is STILL in the stock market! If you want TRUE diversification, you’ll change your scope of investing.

So where can you invest your money if it’s not in the stock market? Where will your money be less at risk if the stock market crashes?

if the stock market crashes 3% checking1) High-Yield Checking Account

I can’t quite believe it, but some people are still surprised to hear that Credit Unions offer 3% interest on your money. Liz and I earn $450 each year, just by keeping $15,000 in the bank! It’s a pretty easy way to continually earn some bucks on your money.

Related: List of Top High-Yield Checking Accounts

2) Money Market Account

The rates aren’t great, but your money is pretty safe in a money market account. If you can find something above 1% today, you’re doing pretty well. The positive? You won’t lose money, even in a down market!

Related: Best Money Market Rates

3) Real Estate

This suggestion isn’t for everyone, but it’s always been a popular way for the wealthy to earn even more money without stepping foot into the stock market. You can have more control and even earn more dollars here.

What types of real estate investing would I recommend?

  • Residential investing – Buy a home or multi-plex, fix it up, and rent it out. When you find good renters, this can be an incredibly profitable venture – typically a 10% return or more.
  • Commercial investing – Just like residential investing, you’d buy a place, market it, and then find a business owner that wanted to rent the space. It can be more difficult to find a good renter, but businesses tend to be longer-term investors than residential renters, which can make the income incredibly passive!
  • Land investing – If you want to own land, one of the best ways to earn money on it today is to rent it out to neighboring farmers. Allow them to grow crop and have them pay you for the use. It’s a win-win!

Resource: Life And My Finances – Real Estate

4) Small-Business Investment

Starting a small business is a great way to earn money if you want to have some control over your investment. Do you have a great idea (drive through dog-shop anyone?) that wouldn’t cost that much to start, but has limitless potential? Why not give it a try? If the stock market crashes, at least you’ll have some control!

Related: How I Earned Over $75,000 With a Blog

5) Precious Metals

If you’re worried that the stock market is going to tank in the next year or two, then maybe investing in precious metals is for you. Typically, when the value of stocks go down, silver and gold go up. Some people like to buy the silver and gold bars. Not me. They’re costly to buy and difficult to sell. We purchased silver through a Motif (if you haven’t heard of this, check it out. It’s way better than investing in real silver…)

Resource: How to Buy and Sell Silver – And Should You Do It Today?

If The Stock Market Crashes…In Summary

Yes, the stock market may crash and your holdings will be worth less than they were before. BUT, if you believe in the United States economy and that the market will bounce back, then why not just keep investing? After all, all those stocks are on sale at clearance prices!

If, on the other hand, you’re a little bit leery of the stock market these days, then take a serious look at the alternative investments outlined above. All can provide a nice positive return and actually put money INTO your pocket, even if the stock market crashes tomorrow.

What’s your take? Are you a die-hard stock market investor? Or do you like the alternatives?

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9 comments to What Happens If The Stock Market Crashes? Is Your Money Safe??

  • Kathy

    My husband and I have actually thought about this. We’ve considered getting out of the market but haven’t done anything yet because of tax implications. During the downturn in 08 we were off the grid in Alaska and couldn’t do anything about our investments, so we sat tight, understood that the loss was all on paper unless we sold, and continued to receive the interest and dividends, which was our purpose in investing in the stocks we had. As long as companies don’t default on their interest obligations or cease or suspend their dividends, we should be okay again. Fingers crossed and watching that basket like a hawk.

    • It can be pretty stressful to watch if you’re near retirement. Have you ever thought about building up some other funds that wouldn’t be impacted as much by the stock market?

  • Lucas

    I would very much like to invest in real estate, however my assets are in the TSP, and withdrawing the funds to invest them would result in having to pay taxes at a rate of 30%!

    Would you recommend establishing a self directed IRA to purchase residential, business, or land? Which would you recommend and why? What criteria should be used to select this type of IRA, or any other venue?

    • Don’t forget that you’ll have to pay tax on that money eventually, Lucas. For Liz and I, we’re saving 17% of our income in our 401k, then we have another 20%+ that we pay tax on, then invest in real estate.

      For me, I don’t mess with self-directed IRAs. Too much red tape and not enough of a benefit. Like I said, taxes need to be paid. It’s just a matter of now or later. For us, we’re investing so much of our income that we’ll probably be in a higher tax bracket in retirement, so why not just pay the taxes now?!

  • Derek!

    Another great article. Your analogy of buying hamburgers and stocks is awesome.

    Your info on diversity is also great. I’m glad to see that we have money scattered in a number of those categories. Not precious metals though, but we do have some rental income.

    Thanks again for some awesome info!

    Keep up the great work!
    Keith Shin Schindler recently posted..Side Hustle Successes

  • Carrie

    You say that the “money market” is pretty safe? Is it safe or not? We are both retired and don’t want to lose anything….

    • Hi Carrie – a money market account is basically a glorified savings account that gets a slightly better return. It’s probably the safest thing out there, but it’ll only earn you about 1% on your money. The only way you’d lose it is if there was a complete market collapse and the government went back on their word to protect your bank deposit (most are FDIC insured up to $250k), which will likely never happen in our lifetime. It’d probably be a bigger risk to put the money under your mattress at home (due to burglary, flooding, fire, etc.).

      Remember though too that the general inflation goes up about 3% each year, so if you’re earning just 1% in a money market account, you’re actually losing money.

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