Are You Ready for the Next Meltdown?

With the fate of the European economy hanging in the balance, we may be on the verge of another extended downturn for the stock market. But instead of making the mistake that many investors made during the last financial crisis, you need to realize that with crisis comes opportunity -- and you don't want to miss out on what could actually be your best chance to make amazing profits.

Remembering 2008
Today's crisis of confidence in Europe brings back plenty of memories about what the U.S. went through just a few short years ago. With bank failures rocking the very foundations of the U.S. economy to the core, the market meltdown of 2008 and early 2009 challenged fundamental assumptions about the way the financial system worked and led to huge attempts at reform that we're all still struggling to complete today.

But along the way, the crisis gave investors some amazing opportunities for profit. Many of the financial stocks at the epicenter of the crisis lost nearly all their value, but most of them bounced back sharply, producing big gains for investors who were courageous enough to jump in when no one else would. Even today, JPMorgan Chase (NYSE: JPM  ) and Wells Fargo (NYSE: WFC  ) trade well above where they did in early 2009. Similarly, cash-strapped companies like Ford (NYSE: F  ) and Las Vegas Sands (NYSE: LVS  ) were priced for failure, but those who bet on their survival were richly rewarded.

This too shall pass
Europe's problems are of a different flavor, obviously. The prospect of national governments facing financial insolvency is another order of magnitude larger than the potential private bank failures that threatened the U.S. three years ago. Still, you have to ask yourself: Will even as huge a step as the abandonment of the euro currency cause so much chaos that business activity comes to a screeching halt entirely? Such huge consequences are unlikely. Rather, just as the U.S. went back to business after the financial crisis, so too will Europe likely emerge without huge disruptions to overall economic activity.

That doesn't mean that hard-hit companies like banking institutions National Bank of Greece (NYSE: NBG  ) or Bank of Ireland (NYSE: IRE  ) will magically return to their precrisis levels. But with investors punishing companies across the European continent as if businesses are going to stop functioning, there are already attractive bargains available -- and more could emerge as the problems continue.

How to get ready
In order to make the most of this possible meltdown, you should be preparing right now. Here are a few things to keep in mind:

  • Cash is king. You don't want to go overboard trying to time the market, but holding at least some money aside when stock valuations are relatively high gives you more firepower when bargains come. Because downturns can last longer and go further than you'd ever think possible, don't be in a hurry to deploy all your spare cash right away.
  • In any market plunge, some investments get hammered when they don't deserve it. For instance, during 2008's collapse, commodities like gold and silver suffered huge losses just when their potential value as a hedge against government irresponsibility was soaring. But after the crisis ended, reality set in -- and metals started soaring again.
  • Hedge your bets. As we've seen, the whole world is holding its breath about Europe. Picking individual stocks may maximize your returns, but it also creates risk. A broader-based investment like European ETF iShares S&P Europe 350 Index (AMEX: IEV  ) could help cushion the blow against any company-specific problems.
  • As one of my favorite authors once said, fear is the mindkiller. If you're going to invest in stocks, you always have to be ready for tough periods like this. Rough patches separate good investors from great ones, and how you handle them can define your success or failure for years to come.

Your make-or-break chance
It's never easy to stick with your investing strategy when the bad news never seems to stop coming. But if you handle situations like this the right way, you'll eventually see them as rare opportunities that give you your best chance to reach all your financial goals. The hardest thing to do is to shift your mind-set away from the pervasive doom and gloom and keep your eye on the ball. But if you can, you'll be ready for meltdowns whenever they come.

Being ready for big opportunities can help you retire richer, but you still need all the help you can get. Read the Fool's newest free special report, "The Shocking Can't-Miss Truth About Your Retirement," and learn the tips you need to succeed no matter what the market throws at you.

Fool contributor Dan Caplinger thinks he's ready for whatever the market throws at him. He doesn't own shares of the stocks mentioned in this article. The Motley Fool owns shares of JPMorgan Chase, Ford, and Wells Fargo, and has created a covered strangle position on Wells Fargo. Motley Fool newsletter services have recommended buying shares of Ford. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool's disclosure policy won't melt down on you..

Read/Post Comments (30) | Recommend This Article (54)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 25, 2011, at 4:17 PM, tjsimone wrote:

    Hi Dan-

    Thanks for the article- I was contemplating signing up for the Motely Fools Rule Breakers with the new year...

    You convinced me there is no reason to spend a few hundred, now...just not worth it...my money will be in cash!

    Thanks

    Tom

  • Report this Comment On November 25, 2011, at 4:30 PM, marysc wrote:

    Tom, don't forget Warren Buffet did his homework while waiting for the market to go down far enough for him to buy. I've made my best money by consistently studying the Fool's advice (yes, that I pay for) so that I'm ready, as the saying goes, when the time is right.

  • Report this Comment On November 25, 2011, at 4:56 PM, barone123 wrote:

    ditto marysec

    I am selling and when I have sold most of my portfolio I hope to go into hybernation for a few years until this crazy times show a glimmer of hope

  • Report this Comment On November 25, 2011, at 5:11 PM, GreenPhotog wrote:

    I'd have made money several times over if I had invested in Las Vegas Sands in the last major downturn. I've told myself if Europe implodes and our markets go way down as a result I'll be ready to jump in; my money is 100% in an ETF shorting Europe right now.

  • Report this Comment On November 25, 2011, at 5:13 PM, JohnnyYuma13 wrote:

    This in no time to be putting money into the market, I started investing for the long term back in 1990 and I have slid back to my 1998 levels after the last meltdown. I am selling everything while I still have some something left, the individual investor has no chance up against programed trading, hedge funds oh and let's not forget congress.

  • Report this Comment On November 25, 2011, at 5:23 PM, OPTIONNUT wrote:

    Johnny is right on track...since January this year the individual investor has not had a chance. Motley Fool Dan, many of us have already had a Meltdown in 2011....where have you been? If there is not a huge year end rally I am out as well.

  • Report this Comment On November 25, 2011, at 6:23 PM, ironyworks wrote:

    Following the fool's recommendations selectively,since the 80s;

    I've come out roughly as well as if i'd just bought an S&P index fund..minus untold hours.

  • Report this Comment On November 25, 2011, at 6:38 PM, SAMSCREEK wrote:

    I disagree about this not being the time to buy stocks. I am up 6.65% for the year and 10.64%

    for the last 15 months. I purchase good dividend paying companies and often on the dips.

    If the year ends on an up trend, great. If it falls,

    great also, because i'll be buying.

    The stocks that I have purchased are, CBOE, MAIN, MKC, PNY and HRL.. All of their stock

    prices are up since I bought them, and MKC and HRL just announced they were increasing their dividends. CBOE and MAIN have already increased their dividends this year and I expect PNY to do so for their January or April dividend.

    I just keep chugging along. I love the really big dips, since it provides me with an even better buying opportunity.

    fool on..

  • Report this Comment On November 25, 2011, at 7:58 PM, dsciola wrote:

    Dan,

    Good analysis on business not ending, but I have to wonder how such a crisis may affect value

    Surely business will not come to a screeching halt for most companies in Europe or here as a result of a meltdown, but what about their overall value?

    Perhaps some companies, i.e. Netflix, that were looking to expand to Europe may not reap as much profit as previously assumed. Or perhaps a domestic Euro company may not return to its pre-meltdown levels of business. Just my thoughts

    Dom

  • Report this Comment On November 25, 2011, at 8:59 PM, Mikeconroy wrote:

    This is about the long term, right? I am running >10% IRR /year in stocks-only IRAs >8% overall including some index funds of various stripes. I hear a lot of folks talking about bailing on the market now. Isn't this precisely the wrong time to bail unless you need the money now? And if you need the money now what the heck is it doing in the market?

  • Report this Comment On November 25, 2011, at 9:00 PM, Mikeconroy wrote:

    PS forgot to mention (and it's significant) that's >10% averaged over 2000-2011.

  • Report this Comment On November 26, 2011, at 7:46 AM, pigvalve wrote:

    I have made tremendous gains since 2008. Some stocks still after some pullback are in the 125-175% gain. Some flamed out but still way positive. My big dividend plays like jnj, mcd, wmt, yum, abt, intc, mst are doing quite well. I have been buying gold and silver and some other natural gas and resource stocks. Almost all have trailing stop orders. 50% Is in cash. Cash is king. The meltdown will come. All you need is a few good plays and you can preserve your wealth. But remember if you wait too long the coming inflation will eat the cash alive.

  • Report this Comment On November 26, 2011, at 9:48 AM, stumptownbro wrote:

    @ironyworks. The Motley Fool was founded in 1993 and Stock Advisor's first pick was in March of 2002. Can you please explain how you have been following the recommendations since the mid 80's?

  • Report this Comment On November 26, 2011, at 10:56 AM, Brent2223 wrote:

    "Anyone who believes exponential growth can go on forever in a finite world is either a madman or an economist."

    —Kenneth Boulding

    To everyone salivating over buying on the dips be careful. When everyone is using leverage to maintain returns that's a big red flag that there is no real growth out there.

  • Report this Comment On November 26, 2011, at 12:04 PM, aboutabuck wrote:

    Long term investing is dead. Short term trading (Holding positions for days to weeks, not buy and hold.) is the only way to make a decent living from the financial markets. I hate using the phrase ’ It’s different now ’ but it is. Since the onset of online trading with live charts and fast information, ETF’s, algorithm based hyper trading with co-location, and futures trading for the average investor, the mechanics of the financial markets have evolved into a different animal then it was 20 years ago. You can see the changes in volume and price movement %'s on a 30 year chart of the s+p.

  • Report this Comment On November 26, 2011, at 1:07 PM, akakroke wrote:

    JohnnyYuma13 is right on. Just look at ALSK which normally trades around 500k shares a day plus/minus 250k. Then on Nov. 9/10 it traded in excess of 10M shares! A MASSIVE dump.

    http://finance.yahoo.com/echarts?s=ALSK+Interactive#symbol=a...

    That's not individual investors. But I'm staying with it until 2013 because of my own research. Other investments (APPL, COH, etc.) I've already sold at break even. My only real concern is a mutual fund invested in energy and this year it's been in the cross-hairs of the politicians. Not good. Waterloo.

    I'll be dropping my subscription to SA and replacing it with Income Investor within 30 days. I learnt quite a bit from SA and consider it to be money well spent but now I need good dividend stocks....

  • Report this Comment On November 26, 2011, at 1:13 PM, akakroke wrote:

    'aboutabuck' is also right; the times have changed. I made my money with the long term approach, only changing every several years, until the Internet bubble; that signaled the 'new era' to me and I began trading in 4-6 month periods ... but now? No, can't do that anymore; too fatiguing....

  • Report this Comment On November 26, 2011, at 1:16 PM, mikecart1 wrote:

    People complaining about the stock market need to man up. You need to play the game that is given to you to play, not get nostalgic over the old rules and old games. In the NFL, you need to deal with not being able to return most kickoffs anymore. You don't just ignore the ball and kick it in the grass when it is kicked 5-9 yards into the endzone. Because if you don't do your job and catch the kickoff or you complain how you have no chance to return it now because they moved the kickoff up 5 yards, then you may miss an opportunity one day where you could catch the ball, and return it, all the way for a 109 yd TD on a kickoff return, and then and only then will you gain a further understanding of how the stock market changes and how you can still score.

    The End

  • Report this Comment On November 26, 2011, at 5:01 PM, JohnnyYuma13 wrote:

    Mikecart1, that is propably the worst analogy given on stock investing and I have been investing for a long time(since double diget % on CDs) The playing field is not level for individual investors. As I said now you have to deal with Programmed trades, Hedge Fund Managers, and inside trades by members of Congress and such. It is a much tougher game now. Us old timers used to research a stock, look at it's fundamentals, cash to debt ratio, insider ownership and PE ratio and then make a choice. Today it's a crap shoot, look at NFLX, "Riding high in April shot down in May" (that's just an analogy so don' correct my time of year blame Frank Sinatra)

  • Report this Comment On November 26, 2011, at 7:14 PM, akakroke wrote:

    Haha, Mikecart1 and his "man up" makes me think of my son in law who hasn't yet come close to having to 'man up' to what I've already done in my life but is not short on preaching to me. As I approach 70 having been the one and only MVP for the year 1961 in my state all star football game, I've learnt Prudence is faster than Paladin and will see to my finances with much caution while keeping an eye on whatever opportunities may arise. I am totally debt free aside from the tax debt; may Mikecart1 be in a better position than me when he arrives at my age.

    And a Foolish Happy Thanksgiving to all!!!

  • Report this Comment On November 26, 2011, at 9:32 PM, rodnog wrote:

    I was under the impression that HFT and hedge funds and what not make long term holding more, not less, important to the individual investor.

    I'm far from an expert, but does anything think there's some recency bias creeping in here?

  • Report this Comment On November 27, 2011, at 6:58 PM, modeltim wrote:

    Cash is definitely king. Worst case scenario could resemble the stock market crash during the Great Depression where the stock market lost almost 90 percent of its value in a little less than three years.

    There will have to be a lot of blood on the street before I put money into the stock market.

  • Report this Comment On November 27, 2011, at 10:35 PM, FreshThought wrote:

    Assuming we hold our nerve, just when do we dive in? Where is the bottom?

    I thought it was there about a month ago, but fortunately didn't have enough spare time to put through any buys.

  • Report this Comment On November 28, 2011, at 11:26 AM, Harker207 wrote:

    My 401k funds are down but my individual stock plays thanks to the Motley Fool are up up up. My only regret in 2011 is not having enough spare cash on hand to buy even more. Can't wait for another ten years of double digit returns out of PM alone.

  • Report this Comment On November 28, 2011, at 12:24 PM, DJDynamicNC wrote:

    @Fresh Thought - you don't need (or even necessarily want) to try to time the market so you buy in at the bottom.

    Look at valuations for stocks that represent solid and sound investments with good management practices, good business models, and good dividend payouts. If those valuations are decent, then the time to buy is NOW, not some hypothetical future dip which may or may not come to pass.

    If you are dollar-cost averaging, investing in sound companies with decent dividends, and avoiding paying out too much in trading fees, then you are doing things the right way and you can hold your own against the computers and robber barons because they don't work the same way - effectively, you're playing a different game than they are, just using the same game pieces.

  • Report this Comment On November 29, 2011, at 5:41 AM, Sunny7039 wrote:

    Investing in the market is like . . . football?!?!

    Now I think I've heard everything.

  • Report this Comment On December 01, 2011, at 4:04 PM, Gato337 wrote:

    I also disagree with the idea that this is not the time to invest in the market:

    I just started investing in January and my portfolios are up %6 and %9 for the year. Granted, I bought in to half my stocks in August and September when the market was doing summersaults, so they've done pretty well since then (all of those positions are up %10+). I used limit orders to execute trades for me whenever the market dipped, so I didnt spend the whole time glued to my computer.

  • Report this Comment On December 02, 2011, at 12:06 PM, jrj90620 wrote:

    With everyone trading today,seems like the best contrary move is to invest for the long run.Do what Buffett has done for decades.Everyone says they can't compete with all the short term traders,but still believe trading is the way to go.Pigvalve is right about inflation.All govts use totally fiat currencies and all want them to devalue,to,supposedly help exports.Very risky being in the common stock of bankrupt govts,which is what fiat currency is.Better to own something real.

  • Report this Comment On December 05, 2011, at 2:40 PM, MHedgeFundTrader wrote:

    The garlic eaters don't want to repay their debts, and the beer drinkers don't want to lend them any more money. That pretty much sums up the financial tensions that exist within Europe right now. The PIIGS countries of Portugal, Ireland, Italy, Greece's, and Spain are lurching from one emergency financing to the next. European interest rates are sky high. Never mind that much of that money was borrowed to buy Mercedes, BMW's and Volkswagens, which enriched Germany's economy mightily.

    This is one of many reasons why I think the Euro will continue to fall against the dollar, possibly to as low as the mid $1.10's sometime in 2012. The US is growing, and Europe is not. End of story. American interest rates are rising, while Europe's are not. Another end of story. This always attracts capital to flow out of the low yielding currency and into the high yielding one, which is creating a rising tide of buyers of greenbacks and sellers of Euro's.

    On Friday, Italian, Spanish and Portuguese bonds traded better than expected. Germany's Chancellor Angela Merkel hinted they might bend a little on terms. The China and Japan have said they would happily take down a chunk of the high yielding European debt. With ten year Japanese Government Bonds yielding a paltry 1%, can you blame them?

    The Mad Hedge Fund Trader

  • Report this Comment On December 05, 2011, at 4:28 PM, Hawmps wrote:

    I sense much fear in many of the Fools on here... perhaps I should be ready to be greedy.

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