Author Topic: Your plan for if the market drops  (Read 5347 times)

ChpBstrd

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Your plan for if the market drops
« on: April 12, 2017, 01:06:12 PM »
Suppose the S&P lost a large percentage of its value this summer. We all (should) know that price drops are opportunities to add risk, not reduce it. What changes would you make after the fact? If any?

Here are some ideas I'm kicking around:

10% drop:
  -Business as usual. Nothing to see here.
  -80% equities allocation.

20% drop:
  -sell most of my bonds and preferred stock, buy VTI with proceeds.
  -90% equity allocation

30% drop:
  -go all-in 100% equities.
  -Is a HELOC available?

40% drop:
  -go all-in small caps (VB) and tech companies (VTF).

50% drop:
  -allocate 30% of remaining assets to buying LEAP calls on
  SPY if liquidity exists.

GreatLaker

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Re: Your plan for if the market drops
« Reply #1 on: April 12, 2017, 01:36:51 PM »
Any % Drop:
  • Rebalance to my target asset allocation as defined by my investment policy statement when any asset class varies >5% from target.
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Bracken_Joy

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Re: Your plan for if the market drops
« Reply #2 on: April 12, 2017, 01:37:43 PM »
Any % Drop:
  • Rebalance to my target asset allocation as defined by my investment policy statement when any asset class varies >5% from target.

+1.
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Eric

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Re: Your plan for if the market drops
« Reply #3 on: April 12, 2017, 01:44:22 PM »
Suppose the S&P lost a large percentage of its value this summer. We all (should) know that price drops are opportunities to add risk, not reduce it. What changes would you make after the fact? If any?

That's not my strategy at all.  I picked my AA because that's what I'm comfortable with in any economic environment.  If I wanted more stocks or more bonds, I'd already own them.
"Compound interest is the most powerful force in the universe."  -- Einstein

L.A.S.

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Re: Your plan for if the market drops
« Reply #4 on: April 12, 2017, 01:44:42 PM »
I intend to continue dollar cost averaging into stocks. I will attempt no changes in behavior.

Incidentally, I had the opportunity to test my resolve in emerging markets over the past couple of years.  I have some lots purchased in 2015 that are still down 6-7% from where I purchased them, and I have some lots purchased in January of 2016 that are up over 30%.  I basically had to watch my investments drop 40% and still keep plowing money in.  When I could find articles discussing emerging market events they were bad.  But often, the fund I am in would drop swiftly with no apparent reason. Its a weird feeling to keep adding money to a falling fund, if you've never done it before.  Easier said than done.
« Last Edit: April 12, 2017, 01:53:26 PM by L.A.S. »

ysette9

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Re: Your plan for if the market drops
« Reply #5 on: April 12, 2017, 01:46:33 PM »
My plan is to "just keep swimming, just keep swimming".
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2Birds1Stone

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Re: Your plan for if the market drops
« Reply #6 on: April 12, 2017, 02:03:58 PM »
Any % Drop:
  • Rebalance to my target asset allocation as defined by my investment policy statement when any asset class varies >5% from target.

+1
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VoteCthulu

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Re: Your plan for if the market drops
« Reply #7 on: April 12, 2017, 02:15:06 PM »
My plan for a small drop: Rebalance.

My plan for a large drop: Search couch cushions for any extra spare change to invest, then rebalance.

My plan for 100% drop: Cry.

Scandium

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Re: Your plan for if the market drops
« Reply #8 on: April 12, 2017, 02:27:10 PM »
40% drop:
  -go all-in small caps (VB) and tech companies (VTF).

Just curious; what's the logic behind this? (if any..)

acroy

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Re: Your plan for if the market drops
« Reply #9 on: April 12, 2017, 02:51:42 PM »
Keep on swimming!
Yeah i'd likely liquidate bonds, buy stocks, if there is a big drop (40%+)
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clumlee

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Re: Your plan for if the market drops
« Reply #10 on: April 12, 2017, 02:52:20 PM »
I'm building my cash position right now. If it drops to a level I'm comfortable with I'll start buying whatever. I have some ETFs (MLP, high-yield, preferreds, 2 foreigns), 2 muni bond funds, and individual stocks. But what's bigger than my list of holdings is my shopping list.

NeoGenMike

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Re: Your plan for if the market drops
« Reply #11 on: April 13, 2017, 02:08:42 AM »
I think a lot of us are HOPING for another 2008. Go all in, Profit. The Market never stays down for long.

Villanelle

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Re: Your plan for if the market drops
« Reply #12 on: April 13, 2017, 05:05:38 AM »
I pay very little attention, though with huge drops like those it would surely be all over the news.  Other than that, I'd not even notice until time for my 3/yr rebalancing.

The only think I might change would be to press DH a little more on going 100% equities.  I'd happily do that today, but he's not quite comfortable with that.  (He is nearly to a guaranteed inflation-adjusted pension, which I feel takes the place of bonds in a portfolio.)  It's not a hill I was willing to die on so I let it go, and we are at 10%.  Anyway, the only reason I'd make that change is because I wish we did that now and it would be part of my strategy if I wasn't doing this journey with another person.  So I'd just take the opportunity to try to convince him to do something I already believe in.

davisgang90

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Re: Your plan for if the market drops
« Reply #13 on: April 13, 2017, 05:32:39 AM »
My plan will be to continue to not try and time the market.  Keep dollar cost averaging and drive on!
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Mr. Green

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Re: Your plan for if the market drops
« Reply #14 on: April 13, 2017, 05:43:11 AM »
My plan is too keep reading whatever book I'm working on, or maybe go mow the grass. A detailed domino plan like the OP's would have me constantly focusing on the market for those thresholds and that's the last thing I want to be doing during a crash. To me, that's playing chicken with a train psychologically.
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Car Jack

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Re: Your plan for if the market drops
« Reply #15 on: April 13, 2017, 06:39:35 AM »
Rebalance.

I'd probably freak out less than most.  I'm 50/50 stock/bond and even in the bond space, 1/3 is US Savings bonds, so I'm good with a 90% equity drop.

Khanjar

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Re: Your plan for if the market drops
« Reply #16 on: April 13, 2017, 07:54:45 AM »
If I have the ammo/ability/will, 20%+(especially greater than 30%), increasing use of margin, HELOC, etc. Never have too much margin such that a subsequent 50% drop would wipe me out, and the ability to clear my margin debt within 2 or so years.

daverobev

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Re: Your plan for if the market drops
« Reply #17 on: April 13, 2017, 10:07:09 AM »
I think a lot of us are HOPING for another 2008. Go all in, Profit. The Market never stays down for long.

Until it does. See: Japan ("The US isn't Japan!" yeah I'm not saying *exactly* Japan, but something. I mean, you might elect a... oh, never mind.)
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ysette9

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Re: Your plan for if the market drops
« Reply #18 on: April 13, 2017, 10:12:28 AM »
Isn't that why we diversify internationally though? If US tanks for a while then I have my VTIAX to balance things out. If Europe gets a cold then I have US and the rest of the world. If the whole world tanks, then I keep my head down at work and plow as much as I can I to stocks everywhere.
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Kaspian

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Re: Your plan for if the market drops
« Reply #19 on: April 13, 2017, 10:26:45 AM »
Rebalance at beginning of July on schedule.  Business as usual.

(Okay, in all honesty--maybe if things really dropped, I'd scrimp, scrounge, and max-mustache myself to try and buy and few more equity index funds than my set DCA does.)
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bender

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Re: Your plan for if the market drops
« Reply #20 on: April 13, 2017, 11:38:36 AM »
You could add a poll:

Example:
If the stock market drops, will you accelerate investing or otherwise change your asset allocation to be heavier weight in stocks.  If so, what is your threshold for taking action?

I stick to my plan no matter what the market does
If the market drops 10% or more, I'll increase my stock allocation
If the market drops 25% or more, I'll increase my stock allocation
If the market drops 50% or more, I'll increase my stock allocation

Prairie Stash

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Re: Your plan for if the market drops
« Reply #21 on: April 13, 2017, 12:11:59 PM »
Try to get some overtime shifts so that I can ramp up purchases.

The multiplier on working an hour now and buying stocks at half price would mean I could work 3 hours less in the future.

yoda34

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Re: Your plan for if the market drops
« Reply #22 on: April 13, 2017, 12:47:09 PM »
You've laid out almost my exact plan with a few exceptions:

-my focus in the big drops (30% and greater) isn't small cap and tech, it is exclusively small cap value

-I also factor in future expectations through the CAPE instead of just a % drop

checkedoutat39

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Re: Your plan for if the market drops
« Reply #23 on: April 13, 2017, 02:49:47 PM »
On a 30%+ drop, look to buy houses/condos in vacationy areas from people puking them. Funding will come from selling savings bonds, which will have appreciated.

SeattleCPA

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Re: Your plan for if the market drops
« Reply #24 on: April 13, 2017, 02:56:03 PM »
Any % Drop:
  • Rebalance to my target asset allocation as defined by my investment policy statement when any asset class varies >5% from target.

+1.

+2
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Retire-Canada

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Re: Your plan for if the market drops
« Reply #25 on: April 13, 2017, 05:16:20 PM »
I'll keep saving and investing through any crashes. A big drop would motivate me to reduce any spending to absolute minimal levels so I can max my savings. If my AA gets out of whack I will rebalance as needed. Nothing particularly dramatic. I'll just keep working the plan.

SwordGuy

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Re: Your plan for if the market drops
« Reply #26 on: April 13, 2017, 07:12:21 PM »
1) Cut my expenses in bad times, just to improve my odds of avoiding a catastrophic failure of our FIRE plans.

2) Re-balance to keep our asset allocation.

3) If we still have a surplus, invest it.  If there are real bargains in rental property, scarf them up.  If there are real bargains on stocks, scarf them up.   Bonds, for us, not so much.  We're already diversified with social security, farm income, and rental income.

ChpBstrd

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Re: Your plan for if the market drops
« Reply #27 on: April 13, 2017, 08:01:47 PM »
I find it curious how some of those who say "nothing" are also saying "rebalance" to their "asset allocation."

Is rebalancing in the event of a crash not the exact same thing as saying you would add more stocks?

E.g. if your AA is 50% stocks / 50% bonds and stocks drop 50%, you are now at 33/77. So you sell bonds and buy stocks until you are back at 50/50. Saying "I'll rebalance" is the same as saying "I'll sell some of my bonds and buy those crazy-on-sale stocks!" It's just that the former phrase sounds responsible and stoic, while the later sounds like a crazed bargain shopper. Yet it's the same behavior.

And why do we rebalance? To maintain a set level of portfolio risk.

In the example above, stocks that have already dropped 50% are less risky than they were before the drop (although it sure won't feel like it). So you buy more of an asset as its riskiness decreases. That is, you rebalance.

Granted, my OP illustrated a changing AA rather than rebalancing. But if you know risk is lower, why not change your AA? Shifting from VTI (total stock, beta = 1.02) to VB (small caps, beta = 1.12) in January 2009 for example, would have been increasing your portfolio risk and volatility. However, since then, VTI is up 160% but VB is up 200%. VB had fallen faster than VTI in the crash (i.e. it had a higher beta) and so it rebounded faster in the recovery (higher beta again). Yet, after falling a ways, its risk/reward had fallen to less than where VTI was before the crash.

Backtest the financial crisis and tell me what you wish you could have done. It usually involves changing your AA to take on more risk.


aceyou

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Re: Your plan for if the market drops
« Reply #28 on: April 13, 2017, 08:37:55 PM »
Not much I could do.  I'm 100% in equities VTSAX currently...very far away from FIRE...stashe is only a bit over 100k.  I put 6k into vtsax each month from my wife and my paycheck, and I'd keep doing that. 

A market contraction would be great for me.  I have very few assets to lose money on, and my 6k/month could buy a lot more vtsax while it's down. 

aspiringnomad

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Re: Your plan for if the market drops
« Reply #29 on: April 13, 2017, 10:57:54 PM »
I admire then zen-like approach of those who would just refer to the IPS; that's what it's there for. But if I'm honest, my strategy would be very similar to the OP's, where I would be like a hound sniffing out perceived bargains, probably in part by overweighting small caps and tech stocks if it gets bad enough for those guys. Having just typed that, maybe it's time to draft an IPS...

sol

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Re: Your plan for if the market drops
« Reply #30 on: April 13, 2017, 11:06:39 PM »
My allocation wouldn't change, but I might be tempted to cut back on optional spending to increase the total amount I invest each month.

NeoGenMike

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Re: Your plan for if the market drops
« Reply #31 on: April 14, 2017, 06:15:30 AM »
Instead of thinking it like you lost money, think of it like this.
It's not a loss unless you sell it. Also think of it not like you just lost value, but the stocks are on sale. You are WAITING for those stocks to go on sale so you can snag them up.

AdrianC

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Re: Your plan for if the market drops
« Reply #32 on: April 14, 2017, 11:15:53 AM »
My plan is to "just keep swimming, just keep swimming".

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GreatLaker

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Re: Your plan for if the market drops
« Reply #33 on: April 14, 2017, 01:32:46 PM »
I find it curious how some of those who say "nothing" are also saying "rebalance" to their "asset allocation."

Is rebalancing in the event of a crash not the exact same thing as saying you would add more stocks?

E.g. if your AA is 50% stocks / 50% bonds and stocks drop 50%, you are now at 33/77. So you sell bonds and buy stocks until you are back at 50/50. Saying "I'll rebalance" is the same as saying "I'll sell some of my bonds and buy those crazy-on-sale stocks!" It's just that the former phrase sounds responsible and stoic, while the later sounds like a crazed bargain shopper. Yet it's the same behavior.

And why do we rebalance? To maintain a set level of portfolio risk.

In the example above, stocks that have already dropped 50% are less risky than they were before the drop (although it sure won't feel like it). So you buy more of an asset as its riskiness decreases. That is, you rebalance.

Granted, my OP illustrated a changing AA rather than rebalancing. But if you know risk is lower, why not change your AA? Shifting from VTI (total stock, beta = 1.02) to VB (small caps, beta = 1.12) in January 2009 for example, would have been increasing your portfolio risk and volatility. However, since then, VTI is up 160% but VB is up 200%. VB had fallen faster than VTI in the crash (i.e. it had a higher beta) and so it rebounded faster in the recovery (higher beta again). Yet, after falling a ways, its risk/reward had fallen to less than where VTI was before the crash.

Backtest the financial crisis and tell me what you wish you could have done. It usually involves changing your AA to take on more risk.

Similar concept, different execution. As you said the difference is changing asset allocation vs. sticking to a pre-defined asset allocation that you are comfortable with based on risk tolerance and timeline.

To some extent it is based on "what if stocks never recover?" Or a black swan event like Japan in the late 80s... Japanese equity investors are still waiting for the recovery. Imagine if a Japanese investor increased their equity allocation  in 1992 because stocks had just dropped 50% so the risk must be lower. It continued to drop for another 15 years and is still 40% below market peak. Risk On!
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merlin7676

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Re: Your plan for if the market drops
« Reply #34 on: April 19, 2017, 09:36:04 AM »
My allocation wouldn't change, but I might be tempted to cut back on optional spending to increase the total amount I invest each month.

This

Cobaka

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Re: Your plan for if the market drops
« Reply #35 on: April 19, 2017, 10:00:02 AM »
Suppose the S&P lost a large percentage of its value this summer. We all (should) know that price drops are opportunities to add risk, not reduce it. What changes would you make after the fact? If any?

Here are some ideas I'm kicking around:

10% drop:
  -Business as usual. Nothing to see here.
  -80% equities allocation.

20% drop:
  -sell most of my bonds and preferred stock, buy VTI with proceeds.
  -90% equity allocation

30% drop:
  -go all-in 100% equities.
  -Is a HELOC available?

40% drop:
  -go all-in small caps (VB) and tech companies (VTF).

50% drop:
  -allocate 30% of remaining assets to buying LEAP calls on
  SPY if liquidity exists.


     Looks to me as if you are getting more aggressive the further it drops which is essentially doubling down on a bad hand, you are going to lose more than if you just maintained the same investments all the way thru the decline.
     Although I am not an advocate of dollar cost averaging, except as continuing to invest the same amount every paycheck or month, what would work best for you would be to come up with a strategy similar to this is something similar to having a percent of your investments in cash, bond and stock funds and reduce your stock percentage and increase the other two as the decline continues.
     I would take those markers as when to reduce stock fund exposure rather than increase.

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Re: Your plan for if the market drops
« Reply #36 on: April 19, 2017, 10:34:34 AM »
My plan for a small drop: Rebalance.

My plan for a large drop: Search couch cushions for any extra spare change to invest, then rebalance.

My plan for 100% drop: Cry.

Yup, this is about the size of it for me too.

I think a lot of us are HOPING for another 2008. Go all in, Profit. The Market never stays down for long.

We don't have to go to Japan. In inflation adjusted terms the US stock market dropped pretty consistently from 1966-1982 (16 years) and didn't get back to its pre-decline pricing until the late 80s-early 90s (call it 25 years).

I try not to let stock market prices dictate my investment decisions, although I suspect that, like sol and VoteCthulu above, I'd be temped to try to cut back on spending and scrounge up extra money in the event of a serious decline. But I see that as different from maintaining a pot of "dry powder" specifically for crashes. Don't know if it really is or not. *shrug*
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sol

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Re: Your plan for if the market drops
« Reply #37 on: April 21, 2017, 02:55:45 PM »
People like to talk about Japan as if it were some catastrophic market collapse, but I just don't see it.  Yes, the market crashed 50% over three years, but it also doubled in the three years right before that. 

Gold prices in 1980 were a whole lot crazier than Japan in 1989, and yet nobody points to gold as a cautionary tale about the futility of investing.  Market priced assets do crazy stuff sometimes, that's part of the game.  That doesn't mean the game is broken.

L.A.S.

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Re: Your plan for if the market drops
« Reply #38 on: April 21, 2017, 03:08:56 PM »
Also, why stop telling us your plan at a 50% drop? Would you be out of dry powder at this point, or what?

What would you do if there was a 60% or 70% drop?



ChpBstrd

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Re: Your plan for if the market drops
« Reply #39 on: April 21, 2017, 08:29:21 PM »
Also, why stop telling us your plan at a 50% drop? Would you be out of dry powder at this point, or what?

What would you do if there was a 60% or 70% drop?

I would be out of dry powder, but the non-options portion of the portfolio would have something like a 30% long-term ROI, so I'd be quite happy.

Retire-Canada

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Re: Your plan for if the market drops
« Reply #40 on: April 21, 2017, 08:41:11 PM »
I wouldn't be happy with a 70% drop in the market. That would be ugly to live through.

ChpBstrd

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Re: Your plan for if the market drops
« Reply #41 on: April 22, 2017, 06:07:34 AM »
I wouldn't be happy with a 70% drop in the market. That would be ugly to live through.

To go into more detail, you probably wouldn't be happy with the economic consequences associated with a 70% drop. i.e. if your companies were also earning 70% less, that would amount to similarly less earnings for you.

A 1987-style computer-problem-driven crash, or a market panic about something you're sure won't matter in the long run, or a tech bubble / bond bubble / real estate crash / etc. that drags down everything else for no better reason than liquidity --- these would be true opportunities.

maizeman

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Re: Your plan for if the market drops
« Reply #42 on: April 22, 2017, 06:55:51 AM »
....a market panic about something you're sure won't matter in the long run, or a tech bubble / bond bubble / real estate crash / etc. that drags down everything else for no better reason than liquidity --- these would be true opportunities.

I don't disagree, but essentially what you're saying is a more constrained case of the general truth that if a person knew for sure what the stock market was going to do in the future that person could make an awful lot of money.
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ChpBstrd

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Re: Your plan for if the market drops
« Reply #43 on: April 22, 2017, 07:32:02 AM »
....a market panic about something you're sure won't matter in the long run, or a tech bubble / bond bubble / real estate crash / etc. that drags down everything else for no better reason than liquidity --- these would be true opportunities.

I don't disagree, but essentially what you're saying is a more constrained case of the general truth that if a person knew for sure what the stock market was going to do in the future that person could make an awful lot of money.

The "won't matter in the long run" group of events includes anything that scares large numbers of investors / sets off programmed sells but does not affect the earnings of most companies. These can be induced from historical experience:

-small wars
-terrorist attacks
-epidemics
-natural disasters
-etc.

maizeman

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Re: Your plan for if the market drops
« Reply #44 on: April 22, 2017, 08:15:42 AM »
I think we may just be coming to the mutual realization that the two of us subscribe to beliefs in different levels of strength of the efficient market hypothesis.

My first inclination thought after reading your most recent post was "if the stock market tends to drop and then quickly recover during small wars, shouldn't there be programmed buys triggered by wars rather than programmed sells?" Did some reading and it seems both small* and large** wars tend, if anything, to be associated with more rapid price increases in the stock market. Huh. I suppose it's a somewhat biased sample in that the analysis doesn't include major wars that the US lost. I imagine those are quite bad for the economy. Anyway, that's a bit off topic.

I'll agree that if we assume there is a set of world events that are known to scare people and drive down stock prices, but are also known to not have significant effects on the underlying economy, that these represent opportunities for the canny investor.

Whether such events exist... *shrug.* We've already discussed the issues with small (or big) wars. For the other categories:

1) Terrorist attacks. The first one that springs to mind is September 11th (and hopefully it always will be, because if it isn't, it'll mean something even worse happened). The total decline in the S&P 500, once trading reopened, was only 11.6%, which is in your business as usual category in your first post.

2) Epidemics. The last really bad one was the spanish flu of 1918-1919. But this was confounded with world war I, so it's hard to judge its actual economic effect or its impact on stock market prices.

3) Natural disasters. Hurricanes like Sandy and Ike or major earthquakes or earthquakes like Loma Prieta and Northridge cause $10s to $100 or so billion in damage, but tend to not even move the market 10%.

I certainly could be wrong here, but to me this doesn't feel like a smoking gun for a market inefficiency.

*Source: http://www.barrons.com/articles/war-is-hellbut-not-for-the-stock-market-1492702379
**Source: https://blogs.cfainstitute.org/investor/2013/09/25/u-s-capital-market-returns-during-periods-of-war/
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Babybalrog

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Re: Your plan for if the market drops
« Reply #45 on: April 22, 2017, 12:18:29 PM »
<20% drop; don't both me, regular rebalancing will happen on schedule.
~50% drop; would lead me to shift from large to small cap value. I believe in Smalls for the long term. Go 100% stocks
>60% drop; I'd probably look for rentals, and other ways to add leverage
 100% drop; cry
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ChpBstrd

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Re: Your plan for if the market drops
« Reply #46 on: April 22, 2017, 03:17:24 PM »
I certainly could be wrong here, but to me this doesn't feel like a smoking gun for a market inefficiency.

For market inefficiencies, I would point to:
1) the 1987 crash, which was essentially a bunch of software bugs. The change in value was unrelated to fundamentals.
2) the 2000 tech bubble, which caused a rise and rapid decline in non-tech stocks. For example, I owned some WMT shares during that period and watched them drop from $70 to $50 simply because investors were losing so much money on technology names and needed to rebalance. Either they were bid up to $70 irrationally, or beat down to $50 irrationally, but neither event was related to a change in earning expectations.
3) the 2008 housing bubble, which caused a rise and rapid decline in non-housing stocks. Why would foreclosures in Vegas and Florida affect things like railroads, energy companies, consumer staples, etc? I can see REITs, banks, and consumer discretionaries - but what explains the other parts of the market besides investor panic?

Wars may not be the best example. The market blipped 2% or so when Great Orange Leader attempted to make Syria into a US/Russian proxy war, for example. At least that's how the media portrayed it. The connection to corporate earnings was speculative at best.

Feiread1

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Re: Your plan for if the market drops
« Reply #47 on: April 22, 2017, 03:38:02 PM »
Wondering if anyone on here has looked at the numbers for market drops more deeply. I heard that something like 90+% of 5-10% drops correct within 3 months. Haven't confirmed that stat, but if true, I wonder if it makes sense to pick a percent drop in that range where you automatically shift a chunk of bond money or dry powder on the sidelines to VTI or something similar..

I haven't run the numbers, but there is only one big drop every decade or more, but probably 5-10% corrections every year. Catching those 5-10% whipsaw corrections might be more profitable than waiting for the big one, which you have no idea when the drop will end. For example, if the market drops 20% do you do something or expect it to drop 20% more. Impossible to time correctly. maybe take advantage of each of the more numerous 5-10% drops. Just thinking out loud here.

chasesfish

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Re: Your plan for if the market drops
« Reply #48 on: April 22, 2017, 06:54:03 PM »
I'd love to say I'd just keep buying more and investing low.

I started buying more conservative funds and prepaying my house in 2009 when I should have been buying stock funds or REITs.
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ChpBstrd

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Re: Your plan for if the market drops
« Reply #49 on: April 23, 2017, 09:01:19 PM »
I'd love to say I'd just keep buying more and investing low.

I started buying more conservative funds and prepaying my house in 2009 when I should have been buying stock funds or REITs.

I'm trying to commit to a plan now, before the panic causes me to act like I did in 2009.