Stock Market Crash of 1929

The 1920’s were a time of peace and great prosperity. After World War I, the “Roaring Twenties” was fueled by increased industrialization and new technologies, such as the radio and the automobile. Air flight was also becoming widespread, as well. The economy benefited greatly from the new life changing technologies.

As the Dow Jones Industrial Average soared, many investors quickly snapped up shares. Stocks were seen as extremely safe by most economists, due to the powerful economic boom. Investors soon purchased stock on margin. Margin is the borrowing of stock for the purpose of getting more leverage. For every dollar invested, a margin user would borrow 9 dollars worth of stock. Because of this leverage, if a stock went up 1%, the investor would make 10%! This also works the other way around, exaggerating even minor losses. If a stock drops too much, a margin holder could lose all of their money AND owe their broker money as well.

From 1921 to 1929, the Dow Jones rocketed from 60 to 400! Millionaires were created instantly. Soon stock market trading became America’s favorite pastime as investors jockeyed to make a quick killing. Investors mortgaged their homes, and foolishly invested their life savings in hot stocks, such as Ford and RCA. To the average investor, stocks were a sure thing. Few people actually studied the fundamentals of the companies they invested in. Thousands of fraudulent companies were formed to hoodwink unsavvy investors. Most investors never even thought a crash was possible. To them, the stock market “always went up”.

What Exactly is a Market Crash?

“Market crash”. Just the sound of the phrase makes most people shudder. But what exactly is a crash, and why do they occur? The answer lies within human psychology. People love bull markets. Bull markets have the uncanny ability to change the collective attitude of society. In a quickly rising market, even the words of rather prosaic business pundits become a form of entertainment. This is what happened in the tech boom as Fed Chairman, Alan Greenspan, became a worshipped celebrity. Eventually the euphoria changes into downright pessimism as the inevitable market crash occurs. Later on, the cycle repeats itself. In order to fully understand these events, we must learn about behavioral finance.

In financial markets, the “majority is always wrong.” When the investing majority or the crowd is overly bearish, this is the best time to be buying stocks. When the crowd is overly exuberant, this is the time to be selling stocks. The financial markets work in this ironic way because not everyone can win in the market. If it were possible for everyone to win in the markets, this would mean that money is being created from nothing. The creation of money, in this manner, is impossible. Therefore the markets are a zero-sum game. Zero-sum means that for every winner, there is a loser. The winner takes the losers money. Zero-sum games are games where the amount of "winnable goods" is fixed. The Start of a Bull Market

The bottom of the market starts at a time when the stock market is weak and the general population is pessimistic. At this point most investors sell after having endured a long and torturous bear market. This extreme pessimism found at a bottom is always irrational and undeserved. Now the market is undervalued and is a bargain. Savvy investors, the smart money, buy bargain stocks knowing that they will be able to sell them higher in the near future. Smart money buying, called accumulation, causes stocks to rise. The smart money often consists of NYSE specialists, Nasdaq Market Makers, hedge fund traders and corporate insiders. These traders have access to information that the general public does not.

Rising stocks eventually gain the respect of mutual funds, as billions of dollars of capital is introduced into the market place. Mutual fund investment causes the stock market to advance in a powerful manner. Much of the steady large trends are powered by mutual funds and other institutional investors. After the stock market has gained, stocks are now fairly valued and are no longer considered bargains. The smart money is now sitting on a large profit, as well. The average investor is still skeptical, however.

As bull market events unfold, retail investors begin to take interest in stocks. Retail investors, or the unsophisticated little guy, make up the vast majority of investors. This group does not invest for a living. Retail investors often make investment decisions based on what they read in financial magazines, from their brokers and from tips from friends. As the flood of retail capital is invested, the market soars, causing great euphoria. At this point in the cycle, many companies become public, or launch an IPO. Companies go public when investor sentiment is most optimistic so as to gain the highest possible stock price. IPO’s generate even more optimism as unsophisticated investors buy into the fallacious thoughts of instant riches. Now is the time when many small investors become wealthy. In this phase, stocks are doubling and tripling as the media cheers on the advancing bull market.

At this point, the smart money sells, or distributes, the now overvalued stocks to overconfident retail investors. The smart money knows that overvalued stocks are no longer worthy investments, and will soon drop in value. Widespread greed always occurs, in some form, at stock market tops. Sometimes this greed takes form as accounting fraud where companies over inflate their values. Other times companies make unrealistic promises, such as dot com stocks without any earnings. These immoral activities can take place because irrational retail investors will buy a stock simply because it is glamorous. To compound the problems, investors will now start to use margin, or leverage, to further accelerate gains. All caution is thrown to the wind as investors think “the old rules don’t apply”.

The Start of a Bear Market

After mutual funds and retail investors are fully invested, the market is overbought. This means that there is no more cash to fuel the rally. The market can only go in one direction: down. All it takes is just a hint of negative news and the market collapses under its own weight. Investors quickly realize the market is made of smoke and mirrors, as frauds or other abuses come to light.

When panic selling starts, a market will always fall quicker than it had risen. Oftentimes, as everyone heads for the exit at the same time, there isn’t anyone willing to buy the stock. This can be especially disastrous for margin users as they grow deeply indebted to their brokers. Bankruptcy is the usual result for these foolish gamblers. The majority of retail investors don’t sell even as the market is plummeting. This crowd keeps holding on to stocks in hopes that the market will recover. As the market plummets 25%, then 50% the average retail investor foolishly holds on, in complete denial that the bull market is over. Finally retail investors sell every stock they own plummeting the market even further. This mass exodus is called capitulation.

The Cycle Starts Again

It is at this point that stocks are undervalued once again. The smart money is accumulating and stocks rise. The majority of retail investors bought at the top and sold at the very bottom. This is the very essence of the “dumb money”. They are perpetually late into the game. This cycle continues over and over. Only the smart money actually “buys low and sells high”. After trading in this manner, the dumb money will adhere to adages such as, “the stock market is risky”. In reality, however, the stock market is only risky if you trade like the mindless majority!

Benjamin Graham's timeless key investing principles

"TO ACHIEVE satisfactory investment results is easier than most people realise; to achieve superior results is harder than it looks." - these were the wise words of Benjamin Graham, the father of two fundamental investment disciplines - security analysis and value investing.

Not a name unheard of in the investing world, Benjamin Graham was an icon for many, including William J. Ruane and Irving Kahn. One of his most loyal and notable disciples, however, was Warren Buffet.

There is no better way to learn how to make it big in the investing world than learning it from the best and it doesn't get any better than Benjamin Graham.

Benjamin Graham was born in the UK in 1894 and moved to US when he was eight and a half years old. Although he came from a poor family, he was exceptionally bright at a young age. He graduated from Columbia University in 1914 and started his investment career by joining Wall Street as a financial analyst.

He established his first private investment organisation, the Benjamin Graham Joint Account, at the age of thirty two. During the Great Depression, between 1929 and 1932, he lost 70 per cent of his US$2.5 million (RM9.05 million) fund. Although some of his clients gave up, his fund managed to survive the worst, and by 1935, he recovered all the losses.

What did Graham consider as critical elements to successful investing? Here, we will briefly note the investing principles propoun-ded by Benjamin Graham.


* Understand the difference between investment and speculation.


Graham established a clear distinction between an investment and a speculation. To qualify as an investment, it must go through analysis, must have a good margin of safety and a satisfactory return. Speculation, on the reverse, merely involves timing and profiting from market fluctuation.


* Do a detailed analysis as stocks represent a share of business.


In the process of doing a detailed analysis, investors need to have the mindset of treating stock purchasing as if they own a piece of the business to evaluate stock prices from the perspective of the underlying asset value, financial strength and future earning prospect, instead of focusing on the short-term fluctuation of the market. This is regarded as the intrinsic value of the company.

* Build Margin of Safety.

Graham's most famous and influential motto is 'margin of safety'. The experiences that he cumulated during the frenzy of the Great Depression made a deep impression on him. He became a very cautious investor whose number one investment concern is the safety of investment principal.

If the intrinsic value of a stock is RM1 and you buy the stock at the price of 67 sen, then your margin of safety is 33 per cent. This serves as a cushion to your investment in the case of a market downturn or to provide you with a margin of error in calculating the intrinsic value, so that the chances of you losing your principal are at the lowest.


* Have a realistic return objective.

The objective of making an investment is to make money. However, Graham warns against aiming for unrealistic return objective. If you expect an abnormally high return from your investment, chances are you will be exposing yourself to unnecessary risk in order to achieve your return objective, which will become speculation instead of investment.

There is no short cut or quick ways to making money. Graham's way of investing is to set a realistic return objective and making investments based on sound investment principles and having the discipline to follow through.


* Treat the market as servant, not master.

Graham believes that risks and returns do not increase proportionately. He sees the opportunities in market volatilities. To him, the stock market is manic-depressive and investors should go for a bargain hunt during a market down turn.

The risk of investment can be significantly reduced if investors understand the business and apply good judgment based on the above first three elements in searching for good fundamental stocks, which are temporarily depressed due to market reasons.

However, he discourages making decisions based on any form of forecast and timing of the market. Instead, the decision making should be made based on price attractiveness.

Graham's stock selection criteria include a price-to-book ratio of 1.5 times, price-to-earnings ratio of below 20 times and debt-to-equity ratio of 0.5 times.


From the above, you can observe that Graham advocates defensive investing approaches. This later became the foundation of the investing principles of the famous investing guru, Warren Buffet, who learned about the quantitative screening process from Graham while working in Graham's company.

However, for a lay person to successfully apply Graham's approaches, you need to be prepared to overcome some hurdles. You need to do a lot of hard work and have good accounting knowledge in order to dissect the financial information provided in the annual report or other financial publications.

In addition to that, you will have to be highly sensitive to any news that will affect the performance of the company or the relevant industries. Having the ability to derive your own conclusion from your research, you will also then need to have the determination and faith in your work so as to prevent yourself from being blown away by the market

Bad News : We're Back to 1931

LONDON, Jan 27 – Barack Obama inherits an economy already contracting at an annual rate of 6 per cent, much like the mid-Depression year of 1931 (-6.4 per cent). This may beat Germany (-7 per cent), Japan (-12 per cent) and Korea (-22 per cent) over the fourth quarter.

But that merely underlines the dangers ahead as the collapse of global trade chokes the mini-boom in US exports, setting off another stage of the crisis.

The US is losing 500,000 jobs a month. Brazil lost 650,000 in December. Beijing says 10 million Chinese have lost their jobs since the crunch began. Japan’s exports fell 35 per cent last month, year-on-year. The central bank is printing money furiously, buying bonds to prevent a relapse into deflation.

So yes, it is like early 1931. Citigroup and Bank of America have more or less disintegrated. JP Morgan’s health is failing fast. General Motors and Chrysler survive only on life-support from the US taxpayer.

But it is not yet like 1933. That second leg down was the result of “liquidation” policies by a Dickensian leadership blind to the dangers of debt deflation. By then, the Gold Standard had degenerated into an instrument of torture. It forced the Fed to raise rates from 1.5 per cent to 3.5 per cent in October 1931 to stem gold loss, with predictable results for shattered banks.

It is worth glancing at the front page of New York Times on Monday, March 6, 1933 to see what the world looked like three days after Franklin Roosevelt moved into the White House.

The newspaper splashed with the story that FDR had closed the US banking system – invoking the Trading with Enemies Act – and ordered the confiscation of private gold. From left to right, the headlines read: “Hitler Bloc Wins A Reich Majority, Rules Prussia”; “Japanese Push On In Fierce Fighting, China Closes Wall, Nanking Admits Defeat”; “City Scrip To Replace Currency”; “President Takes Steps Under Sweeping Law of War Time”; “Prison For Gold Hoarders”.

President Obama faces a happier world. The liberal economic order is still intact, if fraying at the edges. Capital and ships move freely. North America and Europe talk the same political language. China has so far proved a dependable pillar of the international system.

But then the world seemed benign enough in early 1931. It was the second phase of depression that did terrible things.

Roosevelt took over a country where the economic machinery had completely broken down. The New York Stock Exchange and the Chicago Board of Trade had closed. Thirty-two states had shut their banks. Texas had restricted withdrawals to $10 a day.

Few states could borrow on the bond markets. Illinois and much of the South had stopped paying teachers. Schools closed for months. An army of 25,000 famished war veterans squatting in view of Congress had been charged by troopers of the 3rd US cavalry with naked sabres – led by a Major George Patton.

Armed farmers threatening revolution had laid siege to a string or Prairie cities. A mob had stormed the Nebraska Capitol. Minnesota’s governor was recruiting Communists only for the state militia. Lawyers attempting to enforce foreclosures were shot. More than 100,000 New Yorkers applied to go to the Soviet Union when Moscow advertised for 6,000 skilled workers.

We forget how close America came to open revolt. Eleanor Roosevelt feared the country was beyond saving. Her husband kept the faith. He channelled the anger against Wall Street, diffusing it.

“The practices of the unscrupulous money-changers stand indicted in the court of public opinion,” he began his presidency.

The Fed was an ideological deadweight. Bowing to pressure from Congress it began to purchase bonds in mid-1932 to boost the money supply, but then recoiled, before retreating into pitiful self-justification.

A third of the rescue funds in Hoover’s Reconstruction Finance Corporation had been embezzled.

Today there has been no such failure of US institutional imagination, even if, as George Soros argues, the Treasury’s policies have been “haphazard and capricious”.

The twin blasts of fiscal and monetary stimulus have been massive. In short order, the Fed has slashed rates to zero.

It is now conjuring money out of thin air on an industrial scale, buying $600bn of mortgage bonds to force down the cost of home loans, and propping up the commercial paper market to avoid mass corporate default.

Ben Bernanke, a Depression junkie, is proceeding with a messianic sense of certainty. The wash of money should ensure that the next 18 months will not mimic the cascade of disasters from late 1931 to early 1933.

It buys time. But it does not solve the deeper problem, which is that a West addicted to Ponzi credit has put off the day of reckoning with ever more extreme monetary policy with each downturn, stealing prosperity from the future.

It will be an extremely delicate task to right the ship again. Central banks will have to extricate themselves from their venture into the bond markets without setting off a bond debacle in 2010 or 2011. Governments will have to map out of a path of Puritan discipline for year after year.

This will be Barack Obama’s grim test of statesmanship. - Daily Telegraph

Silicon Valley hit by layoffs

THE recession turned up late on Silicon Valley's doorstep but is likely to stay awhile, as technology companies slash thousands of jobs and rein in costs to make up for shrinking earnings and tight-fisted customers.

Job cuts in the technology sector have trailed other industries until recent weeks. Now they are coming fast and furious as the economic downturn grips the Valley, the strip of land in northern California that is home to household names like Google Inc and Amazon.com Inc units.

Tech giants like Intel Corp and Microsoft Corp are laying off thousands of employees, while start-up companies are firing in smaller numbers as they struggle to survive with fewer customers and venture capital dollars.

And this is just the start, analysts say, expecting thousands more to lose their jobs this year as the recession forces the industry to slash marketing and capital spending.

'Organisations are saying, 'What is the absolute nuclear winter? Let's plan for that',' said Mr Adam Charlson, senior partner at executive search firm Korn/Ferry International Inc , who works closely with the recruitment divisions of top tech firms.

'What you're seeing now is organisations putting those plans into reality.'

Last year, Silicon Valley lost 11,700 jobs, according to Mr Steve Levy, senior economist at the Center for the Continuing Study of the California Economy (CCSCE). The number is small compared to the 200,000 jobs lost after the dotcom bubble burst in 2000, but that is because the 2008 numbers don't reflect recent layoffs yet, he said.

'The headline is that the recession has hit Silicon Valley,' Mr Levy said. As a result, he said he was 'substantially revising downward' employment predictions for 2009.

California's jobless rate hit a 14-year high of 9.3 per cent in December, significantly above the national average of 7.2 per cent, according to state officials.

Once bitten, twice prepared

Some analysts said they are reading the mass layoffs as preemptive acts by tech companies. When the last recession hit, tech companies were too slow in cutting costs and laying off workers, said Mr Andy Miedler, a senior technology analyst at Edward Jones.

But not this time, he said. 'Layoffs and cost-cutting are unfortunate, but companies have to make tough decisions in a rough economy to preserve their own financial position.'

Prof Mark Cannice, a professor of entrepreneurship at the University of San Francisco, said Silicon Valley has been 'inoculated to some degree' after the dotcom bust.

'Many firms didn't survive .... The ones that survived are much more efficient and resilient and were funded on sounder business models,' said Prof Cannice, who publishes a quarterly Silicon Valley Venture Capitalist Confidence Index.

But he said Valley companies are not entirely immune - especially venture capital-funded start-ups. As large companies like Microsoft and Google cut back on spending, start-ups that supply them with software and other IT could run into trouble.

With venture capital funding falling 71 per cent in the fourth quarter of 2008 from a year ago, start-ups could be forced to fold up if they can't sustain their business and investors cannot fund them any longer.

But mass layoffs in the tech sector need not necessarily be all doom and gloom. They could actually boost innovation as laid-off engineers, scientists and other highly skilled individuals decide to pursue their own ideas.

Calling it 'forced' entrepreneurship, Prof Cannice said he was optimistic that the current layoffs would 'unleash the next wave of creative, thoughtful entrepreneurs'.

Layoffs in the traditional tech sector could also spur employment in the alternative energy sector, recruiters said.

Mr Neil Sims, managing director of executive search firm Boyden's technology practice group, said the so-called 'cleantech' sector - which employs environmentally friendly technologies - will continue to grow and offer jobs.

'It's not that the sky has fallen entirely,' he said. -- THOMSON REUTERS

Protecting Your Portfolio from Inflation

Investors are being haunted by the threat of inflation, despite the fact that real inflation is nowhere to be seen.

The effects of inflation on an investor's portfolio are so pernicious that they can't be ignored. Even in the low-inflation environment, market pros are keeping close attention on Treasury Inflation-Protected Securities (TIPS), bonds guaranteed by the federal government to keep up with rising prices. TIPS are out of favor in the market, as most economists will tell you that inflation is the least of our concerns right now. With the economy mired in recession, falling prices—or deflation—pose more of a threat.

Gasoline prices are down 56% from last July, and consumers are still slashing spending, says Deutsche Bank (DB) economist Joseph LaVorgna. "The consumer pullback is clobbering inflation," he wrote Jan. 20.

Yet fears of an eventual return of inflation can't be dismissed. That's because governments are spending an unprecedented amount of money, while central banks are slashing interest rates, to spur economic growth. In effect, "We've thrown a lot of money into the system," says David Hinnenkamp, chief executive of KDV Wealth Management.

Governments may even add to that inflation threat. To combat deflation or pay off debt, "A lot of governments will be tempted to start printing money," says Michele Gambera, chief economist at Ibbotson Associates, a subsidiary of Morningstar (MORN). "This may cause inflationary pressure worldwide."

A Relatively Cheap Hedge
With so much extra money sloshing around, a strong recovery in the world economy could send inflation soaring again. That's why some experts are telling long-term investors to buy TIPS. Without protection, inflation can erode the buying power of investment portfolios. On paper, a conservative portfolio might tread water, staying at the same nominal value, but that's little comfort when the price of everything else—from housing to food and energy—is rising.

TIPS are relatively cheap, and may be necessary insurance for investors who can't risk a loss of buying power. "For the person who will retire in less than 10 years or who has already retired, it may make sense to allocate some to TIPS," Gambera says.

There is some evidence the appeal of TIPS is returning slightly. Tony Crescenzi of Miller Tabak notes that 10-year TIPS were priced on Jan. 23 for the consumer price index to rise 0.72% over the next decade. That's a small increase, but its the highest since Nov. 17 and 15 times the almost negligible inflation expectations of three months ago.

Deciding When to Jump In
The problem, though, is that conditions in the next few years could make TIPS very unattractive to investors. The value of TIPS is indexed to U.S. government inflation data, so low inflation makes TIPS less attractive compared to other assets. Also, while aggressive government spending and rate cuts are likely to prevent full-blown deflation, negative government price data, if it occurs, would be bad news for TIPS holders, who would see their bond yields shrink in response.

Marilyn Cohen, president of Envision Capital Management and writer of the Tax Advantaged Investor newsletter, says the inflation threat is "way down the road." She doesn't expect inflation to return in either 2009 or 2010. She believes investors should avoid TIPS for now, preferring safe short-term corporate bonds until signs of inflation actually appear on the horizon.

In other words, investors may be right to worry about inflation, but that doesn't mean it's time to dive in and buy TIPS or other inflation hedges right now. "The difficult part will be making a call on when that happens," Hinnenkamp says.

Less Volatile Than Commodities
Another inflation hedge traditionally favored by investors has been commodities like oil, gold, or other precious metals. But Gambera notes that in the past year these assets have had "very high volatility." Those wild swings make them less reliable for conservative investors. TIPS, because they are issued by the federal government, are more reassuring to investors trying to flee the market madness.

The essential appeal of TIPS remains that they are a government-backed refuge of last resort. If Cohen and others are right, TIPS may not make money for some time. But they provide insurance to skittish investors during uncertain times like these

Ten ways to survive the recession

With the global economy now officially in a recession, here are 10 tips on how to protect your home, pension and savings.

1. Insure your income
The Government will help home owners who lose their jobs by paying the interest on mortgages of up to £200,000 from the 13th week after redundancy. But this will not help couples in which only one worker loses their job; neither will it pay for interest on other loans.

Alternatively, you could arrange insurance linked to your income to pay out monthly so you have funds to cover your debts. For example, a £35 a month policy with Pay Protect will insure 60pc of your gross earnings and pay them for a year, up to £1,000 a month.

Meanwhile, it is possible to specifically insure your mortgage repayments, usually for up to two years, by buying a mortgage payment protection insurance policy linked to your home loan. Do check the small print – many of these policies will not pay out if you are self-employed, work on a short-term contract or if your employer has already announced job cuts.

2. Pick a winning card
Paying off credit card and other consumer debts is vital. But card issuers are pushing up their prices and reducing "interest-free" periods. While it's been the norm to have 56 days to pay before interest kicks in, many cards have cut this to 50 days. Balance transfer fees are also rising.

If you need to switch to a cheaper card, Tesco and Barclaycard OnePulse both accept transferred balances, will charge zero interest for 14 months and still give 56 interest-free days, according to moneysupermarket.com, the comparison service. There is a 2.9 per cent transfer fee in each case, and after 14 months interest climbs to 14.9 per cent at Barclaycard and 15.9 per cent at Tesco. But don't do any spending on the cards during the 14-month interest-free period.

If you're not in debt, think about a cashback card which reimburses you for part of your spend. Shell MasterCard from Citi refunds 1 per cent of your spending and 3 per cent on your Shell fuel, while American Express refunds 5 per cent for the first three months up to £200.

3. Overpay your mortgage while you can
If you overpay you can also take payment holidays if you run into difficulty. But that aside, you could cut your mortgage term considerably. Over a 25-year period, the maths on mortgage overpayments certainly stacks up.

A homeowner on a lifetime tracker mortgage from First Direct paying around £1,000 per month in October would have seen their minimum payment drop to £690 now. If rates stayed at their historic low and the homeowner continued paying £1,000 per month, they could expect to save £16,000 over the term and pay off their mortgage nine years early.

4. Keep savings in an easily accessible account.
Savings rates have fallen from the giddy heights of more than 6pc but there are still rates around the 4pc mark. You might have to act quickly as interest rates are expected to be cut in the New Year.

5. Take control of your pension
If your pension is directly linked to the stock market, as most private sector plans now are, you may have watched recent roller-coaster share prices with trepidation.

If you are younger than 50, the markets should have recovered long before you retire. If you are older, most well-planned investment-linked schemes are so-called lifestyle pensions, which gradually shift investments out of equities into bonds as retirement approaches.

If you are close to your 50th birthday, however, it may be worth checking with your pensions manager – you may want to discuss with your advisers whether it makes more sense to put such "lifestyling" on hold until markets settle.

This may also be the case for anyone in their fifties; if a big parcel of shares is about to be sold, you may wish to consider delaying that temporarily.

More difficult decisions face those whose portfolios were risky in the run-up to retirement, and who could be sitting on losses. In this case, you have two options. You can work longer or delay taking your pension, perhaps by switching it into a drawdown scheme, which allows investments to continue until the market bounces again. Take advice, as the second option can be fraught with risks.

In any event, you have to crystallise your pension fund at 75, when you must buy an annuity.

6. Fix your retirement income
If you are happy with the size of your pension nest-egg then it might make sense to buy an annuity soon, which guarantees a fixed pension throughout your retirement. Annuity rates have risen marginally over the past year, but are expected to fall again as interest rates decline – this means you will get a smaller income from the same-sized pension pot.

7. Keep an eye on your final salary pension
If you have a final salary pension underwritten by the Government or a strong employer, you have nothing to worry about.

But if you are expecting a big pension from a company that you suspect may not survive the recession, then consider transferring out. If there is a black hole in your employer's pension scheme, your pension will be rescued by the Pension Protection Fund. But the most you can receive is £27,000 a year if you work until retirement, and those younger than 50 will only gain a maximum of £21,000.

8. Shake up your share portfolio
With interest rates on the way down, you could reorganise your investments to buy utility companies, supermarkets, Marks & Spencer, pharmaceuticals and tobacco companies, all of which are expected to continue paying attractive dividends.

Bryan Johnston, a director at the stockbrokers Bell Lawrie, recommends starting a monthly savings plan at once. "The market is completely detached from reality, and at some stage there will be a big bounce," he says. However, this strategy is recommended only for those with strong nerves.

9. Cut the cost of essential insurance
Do not automatically accept a renewal quotation for either motor or household insurance. Tell your insurer you are not happy with it and intend to shop around. They will normally reduce the price for you. It's worth shopping around anyway, as you may get it cheaper still.

10. Boost your income
Take on a part-time job or advertise for a lodger. The advantage of renting out a room is that it is tax-free under the Government's rent-a-room scheme. Unlike a part-time job, you can earn up to £4,250 a year tax-free. Part-time earnings, though, will be added to those of your main employment for tax and National Insurance purposes.