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?
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:
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?
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.
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!
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…)
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?
My name is Derek, and I have my Bachelors Degree in Finance from Grand Valley State University. After graduation, I was not able to find a job that fully utilized my degree, but I still had a passion for Finance! So, I decided to focus my passion in the stock market. I studied Cash Flows, Balance Sheets, and Income Statements, put some money into the market and saw a good return on my investment. As satisfying as this was, I still felt that something was missing. I have a passion for Finance, but I also have a passion for people. If you have a willingness to learn, I will continue to teach.