Posts Tagged ‘Market Crash in 2008’


Surviving the Stock Market Crash in 2008

by Ziva Beck in Must Read, Stock Market

In January 2008, we went away for a week for a family vacation. During the week we were out, the market took a nose dive and the S&P 500 index dropped more than 5%. I didn’t like it at all!

That weekly slide got me thinking about how much down side I can really take and how would I feel if the stock market was down 10%, 20% or even more. In other words, I started thinking about my risk tolerance in the event markets go down.

Some financial advisors recommend subtracting your age from 100 to determine the percentage of your exposure to stocks. For example, if you are 30 years old and subtract your age from 100 then you should have 70% of your investments in stocks. That is all well and good until you are actually faced with a loss. Your age is a good starting point for determining your asset allocation. Additional factors to consider include your future earnings potential, how easy it is to replace the amount that is lost and when do you need the money. In general, if you expect to make more money in the future and don’t need the money for a very long time, you can take a higher risk and invest more in stocks.

To get a better understanding of your risk tolerance, you can take a look at the table below. It shows the amount of Loss based on the % of your money in stocks for total available assets of $100,000 and a market drop of 30%.

When further examining my risk tolerance, I realized I was very uncomfortable loosing more than 6%-10% of my total assets. My whole asset allocation had to be revised. I sold most of my stock funds and moved the money to safer investments.

Later in the fall of 2008, the market had a crash of over 30% in what is known one of the most painful market crashes in recent history. I lost 30%-40% in my mutual funds like everyone else. But because my overall investment in the stock market was adjusted to my risk tolerance I didn’t loose more than I was comfortable loosing. It still hurt but was manageable.