*Disclaimer: The plan below is suitable and comfortable for myself. Some parts might suit you too. I am not a financial advisor or guru. Please evaluate your own financial situation and act accordingly.
Step 1: Prepare an Armageddon Fund
Prepare yourself. Save up an Armageddon Fund. This is the sum of money that you can use for investment when the markets crash (>30% drop). Do not confuse this money with the Emergency Fund. The money in the Emergency Fund should only be used in the event of unforeseen emergencies (retrenchment, surgery, accidents etc.) Personally, I have 3 months worth of salary as my emergency fund.
I have an Investment-Linked Policy (ILP) maturing in July 2014. This product is a joint effort between UOB and NTUC Income. So, this lump sum of $50k will turbo-boost my Armageddon Fund. UOB and NTUC Income are unlikely to collapse anytime soon, so I am confident of getting my money back in 2 years time. ^^
Besides having the power to buy cheap stocks/ average down during a market crash, the Armageddon Fund can also give you confidence and peace of mind. You will not panic as much when everybody around you are screaming "Sell! Sell! Sell!". With a calm mind, you can make better decisions.
Step 2: Invest in Quality Dividend Stocks
"What? Invest in dividend stocks? But the prices of dividend stocks will also drop during a market crash!"
Since the prices of all stocks will drop during a market crash, why not have stocks that pay dividends? Firstly, the dividends will help to cushion the temporary price drop. The market is not going to crash forever. Secondly, dividends can also help to support the stock price once the yield becomes attractive. Lastly, market crashes do not happen every year. It usually happens in intervals of 8 to 10 years. Within these intervals, the amount of dividends you accumulated will be significant enough to compensate for the price drop.
You may ask "But what if the company cuts dividends or worse, stop dividends completely?"
Simple. Choose those solid bluechips that will not cut or stop dividends during a crisis. Let's take Singtel as an example.
Dividend History of Singtel:
2008 (sub-prime crisis) - $0.125 per share
2009 (market bottom + H1N1 epidemic) - $0.125 per share
2010 (market recovery) - $0.142 per share
2011 (Japanese Earthquake + Euro debt crisis + Arab Spring + US credit downgrade) - $0.158 per share + special dividend $0.10 per share = $0.258 per share
2012 - $0.158 per share