What you can learn from the Stock Market Crash - Part 2

4) HOWEVER, DON'T LET THIS SCARE YOU AWAY FROM STOCKS

Are you wondering how I can talk about stocks going to zero in one breath and then encourage you to own them in the next? The reason is that you will never earn large investment gains over the long term by investing in bonds or bankCDs . Just be sure to recognize the risks involved in stock investing, especially during severe bear markets, and allocate your money to this asset class accordingly. And always remember one of the most important and ironic truths of investing: asset classes that are hated by investors now typically outperform in future periods.

5) DON'T LIMIT YOURSELF TO "LONG-ONLY"

Most people invest in the stock market by owning mutual funds or holding shares in individual stocks. There's a fundamental problem with this: "long-only" investment vehicles like these only enrich investors during rising markets. I encourage you to add other investing tools to your investment toolbox so you can profit during all kinds of markets. Read up and learn how to short stocks. Learn how stock options work. Start small and gradually develop experience with these other types of investments, and you will become an all-weather investor.

6) STAY HUMBLE. RESPECT THE UNPREDICTABLE NATURE OF THE MARKET

The sectors, markets and companies that may seem like great investment opportunities today quite often end up being grave disappointments to investors who follow the herd. Remember tech stocks in 1999? Or real estate in 2006? Both seemed like great sectors at the time.

Markets can be highly counterintuitive, and risks are often only visible after the fact. Try to avoid consensus investment thinking, and don't fixate on the risks that are obvious to investors today. Instead, train yourself to anticipate what risks investors are likely to think about in the future.

7) SAVE MORE

I apologize for closing this essay with such an unpalatable final piece of advice, but the easiest way to make up for investment losses is to increase your personal savings. Most investors will need a combination of investment returns and significant savings to reach their financial goals, whether those goals are early retirement, a certain level of net worth, or a college fund for a young child. When your investment returns have been below your expectations, you can make up the difference by spending less of your income and allocating the extra savings to these longer-term goals.

We may live in a society that collectively saves and invests very little of its discretionary money, but if you save aggressively, take prudent risks, and remain mindful of the various strengths and weaknesses of stocks as an asset class, you will achieve your financial goals. Good luck!