The investors that have been wiped out in this downturn are the ones that did not plan ahead, says Steve McDonald. Booms and busts are the nature of economic cycles. And investing only in stocks is financial suicide. Steve says to survive this crisis – and the inevitable ones that follow – investors need to diversify their portfolios and stick to tried and trusted models.

This from Investor’s Daily Edge:

“Fear frustration; Some Call it Quits,” a recent Wall Street Journal article, unknowingly summarizes what I have been saying for a long, long time.

The article is a short list of people who have thrown in the towel on the stock market. In every instance, the people described themselves as having everything or most of their money in the stock market.

A formula for disaster.

All of the people were professionals, all were successful, or sounded so from the description of them, and all must try, very hard, to ignore all the good advice that’s out there about how to invest your money.

After many years of trying to get investors to listen to good advice, I know it’s a waste of time to say this again, but you cannot have all your money in stocks. In fact, I left the brokerage business because I was sick of my clients ignoring what I told them to do and then blaming me because they were losing money. Here we go again.

It is financial suicide to invest only in stock.

Here’s one of the saddest stories I know about learning this lesson the hard way.

Paul, a former client of mine, just retired from a Fortune 500 company with a huge stock, stock option and 401K-rollover portfolio. This guy was the poster child for how to do your retirement planning right, around $4 million.

He took his entire 401K and rolled it over into some great mutual funds. Good move, he didn’t want to be bothered with the day-to-day stuff and knew this particular group very well. He also understood the fee structure and was ok with it. This portion was about 25 percent of his entire net worth.

The rest of his money was in stock options and stock in his former company, one that he rightfully held close to heart. He credited this company with everything he had.

Two problems that are common to many retirees: one, he had too much in this wonderful company. Investments are not collectables or mementos. Paul refused to accept this.

Two, he had everything in stock. Despite my best efforts, he refused to budge from his positions. When I first met with him, his company stock was at 94. Within three years, it was at 12. That’s an 87 percent drop in value. Three fourths of his total worth dropped 87 percent.

Leaving yourself open to the full brunt of the stock market will always have the same outcome.

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INTERNAL ENDORSEMENT Stop Playing the Stock Market Lottery! In the ongoing destruction of the capital markets, no haven is safe. Gold… down. Blue chips… down. Utilities… down. Consumer staples… down. Cash? Well, maybe for a little while, but we all know the dollar is doomed. Why risk your precious funds in the stock market lottery? Did you know you can make stock market returns… without stock market risk? You can! And there has never been a better time than RIGHT NOW for this investment…

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The past six months should be enough to prove to you that the stock market, while it has great long-term returns, is a risky proposition. There are techniques that if used properly will reduce that risk, but can’t ever eliminate it. Not diversifying properly in stocks, bonds and cash, as everyone now knows, is as close to a guaranteed loss as you get in this business.

Investors have severe tunnel vision and an unwillingness to allow for failure in their investment planning, or lack of planning. If you do not plan for the type of market we are in now, you will not survive.

There have been six different “end of the world markets” since I have been investing and working in the investment industry. Every one came after a period of crazy increases in real estate and/or stocks. It is the nature of the beast.

In case you haven’t figured it out yet, there will be another market just like this one; maybe worse, it is how the market works. Call it financial selection, market cycles or just craziness, but you must plan for the next inevitable crash or be a victim again.

How do you survive these killer markets? Diversify with stocks, bonds and cash investments, use reliable research, avoid listening to conversations about investing at parties, and stick with the tried and true. This advice may seem boring and nonproductive at times, but it is the only way I have found to be there to fight another day.

Source: A Survivor of the “End Of The World Market”