How To Avoid A Stock Market Crash

All the theory in the world in the form of   "10 Steps to... ,"   "25 Steps to... ,"   etc, would be no good without seeing it in practise. So, let me start with what I did with my own money and then tell you why I did so, and what prompted me to do so.

• By mid-2007, I moved all of my retirement money into a money market account in the company 401(k) plan.
• By mid-2008, I pulled most of my non-retirement money also out of the stock market, and deposited it in FDIC insured CDs and Online Interest-bearing Accounts like HSBC Direct Online Savings, Charles Schwab Investor Checking, Etrade Complete Savings and INGDirect Electric Orange. At that time, these banks offered 3-4% interest.

The result of this move was that my money, both retirement and other, returned a whopping 3% average gain in 2008, whereas the average stock market, with the S&P as a benchmark, lost 37% during the same period. In this economy, money not lost is money gained. Thus, my effective gain was 3 + 37 = 40% relative to the stock market. Here's the proof: my 401(k) statement.

You might be thinking - "Oh, you just got lucky..." Well, not really. And, in the next few paragraphs, I'll prove to you how and why.

The Importance of Education To Avoid Stock Market Crash

I was a novice investor at the turn of the century. I do admit that I made huge monetary contributions to the dot-com stock market crash of the early 00's, if you know what I mean. Having lost five-figure sums in that meltdown, I asked myself, why is this happening to me? I consider myself to be reasonably smart, but still lost tons of hard-earned money. Why?

Answer: The lack of proper stock market education.

As they say, the three most important factors for real-estate are - location, location, location.

Similarly, the three most important factors for success in the stock market are - education, education, education. I firmly believe that the stock market education that I acquired during the early to mid 00's is what helped me make the all-important decisions of moving money out of the stock market and invest it in safe instruments. It was definitely not pure luck that helped me avoid being in the stock market crash.

Once you decide to traverse the path of education, there are many options. There are tons of free material available on the internet - some by real experts, and some by self-proclaimed experts. Notwithstanding the fact that it's sometimes difficult to discern the grain from the chaff, I say the free material is only worth what you pay for. The best education that I received on the stock market was from, you guessed it, books. There is really no easy way out when it comes to learning about the stock market. In reality, it's no different from the education that you received as part of your degree. You relied on good books for that, and the same is the case for the stock market.

But, what books to read? If you are like me, you have a full-time job that takes up most of your waking hours, hence you need to spend your spare time wisely. Also, you need to be very careful in selecting the right authors, because wrong advice can do you more harm than good.

As Charles Caleb Colton said,  "Books, like friends, should be few and well chosen."   Here's the shortlist of books that I found very useful, which eventually helped me stay out of the stock market crash.

These are the only few books that you need to gain a stronghold in the wild world of the stock market. All three together will set you back by about thirty dollars, even less if you buy them used (watch out for the edition though). This expense is nothing when compared to the hundreds, thousands or perhaps tens of thousands of dollars that you would gain, and most importantly, not lose, in the stock market for years to come. Again, I cannot emphasize enough on the importance of education to help you avoid being in the next stock market crash. I would strongly encourage you to read all the books mentioned above. You will then gain competitive advantage over the rest of the investing public and turn yourself into a smarter, more careful and more coherent investor. Translation: You would gain more in the stock market and would stay away from the next stock market crash.