Unfortunately the stock market is more complicated than just buying a few stocks and getting rich. Where there are profits, there are also losses, sometime very large losses. The stock market has a bad habit of moving decisively downward in sudden plunges. No one has yet learned how to predict a market crash, or even to definitely identify one until after it happens. By then of course, it is too late for your money.

Historically the market has always rebounded, but the timing has varied substantially from one market plunge to another. Historically, if an individual holds on to their stocks long enough, and rides out the market through the bottom of its downward trough and into the next market rally, they would eventually be rewarded with a profit for their fortitude. However, when your retirement nest egg is half of what it was last year and your retirement date is three months away, it is hard to console yourself with market theory.

Stock markets tend to fall much more precipitously than they rise. This can make financial planning difficult, especially since no one ever seems to know when the next market crash is scheduled. Remember when the market takes your capital away; you have less of it left to help you get back to where you started. The table below shows the dramatic impact that stock market declines can have on your financial planning:

A catastrophic loss as you approach retirement can devastate your financial plans, because there is no time to recover. If you need $356,000 to meet your projected retirement goals, and a 25% market correction takes $89,000 off the table, your retirement plans will require either a major revision or a substantial delay.

From a financial point of view, the stock market is a scary place. This presentation is not intended to deter you from considering the stock market as a source of asset growth, nor is it intended to recommend that you invest in the stock market. Our sole purpose is to instill, in the reader, a grave sense of respect for the financial uncertainties inherent in the stock market. Anyone considering the stock market as a potential depository for retirement funds should make themselves familiar with the range of risk management tools available to stock investors. These include diversification (see Managing Specific Risk), Asset Allocation (see Managing Systemic Risk) and indexed-accounts (see Zero Market Risk), and others. Individuals considering direct investments in common stocks or bonds are urged to seek out additional sources of investor information and to thoroughly acquaint themselves with the technique of asset allocation, as well as other risk control and investment management tools and methods.

Financial regulatory agencies know full well the risks of the stock market and have enacted numerous laws to protect the average citizen from the mood swings of the stock and bond markets. However, these rules and regulations are only partially effective and their success depends on an educated and wary public. (See Saving versus Investing)