How would you handle a 90% drop in the market?

[Mr.Macinstache]

Yes the citizens own our national debt of 17 trillion. It's not all China or Japan. We are responsible for it. Investors, businesses, taxpayers and the like are on the hook. When we had the banker bailout, sky is falling panic, our then Treasurer Hank Paulson, ex CEO of Goldman Sachs was a champion of it. Now why is it we got another ex Goldman guy, Tim Geitner for Treasurer? They are there to manage the "bankruptcy".

Um, did you fail to put on your tinfoil helmet this morning?  First, Mr. Geithner is no longer Secretary of the Treasury.  Second, please show me where in this bio he was ever employed by Goldman Sachs: http://en.wikipedia.org/wiki/Timothy_Geithner

Such a nice tone along with your finger wagging.

I'll correct myself, Geithner was the former President of the Federal Reserve Bank of NY. Nothing to see there. Surely no collusion.. everything's on the up and up, never mind those Treasury Sec's cheerleading for those AIG/Goldman/etc bailouts.

http://www.prwatch.org/news/2009/11/8705/geithner-aig-goldman-story-keeps-ticking

No fair picking up aliases, freeyourchains2.

LOL what? Who's wearing the tinfoil now?

Have a good day.

[Christof]

A 90% drop in share price absolutely devalues your portfolio. If not, then I'd invite you to sell your portfolio for its (still 100%) value and purchase equivalent shares at 10%.  Of course this wont work.

Of course you loose money if you sell your portfolio when you can only get 10% of what you paid for it. That's exactly what I said: If you do not need to sell shares a 90% drop doesn't affect you that much.

90% is almost by definition an economic collapse, and even those with "safe" jobs may find that they pay almost nothing (deflation) or are unpaid (ridiculously tight money recession where employers simply don't have the cash for payroll).  Sure you could survive through barter, but the stock market doesn't take chickens (maybe poultry futures?).

90% is likely a very deep recession, it's not an economic collapse. I'm not saying that it'll be easy times. I have lost everything and started by zero when my family escaped communist Germany. Have you ever lost everything? My family have experienced periods when bartering was the only way the way to get food. Most of Europe had this experience during war, communism and reign of dictators in the past hundred years. Are we still here? Hell, yes.

Historically, those that owned companies and managed not having to surrender their property to the government were much better of than those that saved cash or didn't own anything at all.

And with regard to unemployment: There was only one year in the past century in the history of the US were the employment rate was below 75%, that was 1933. At least three out of four people aged 14 years or older had a job.

[suntailedshadow]

90% drop world wide?

I for one, will barricade the windows and doors of my house.  Then (donning a ninja outfit) I will start to secure fresh meat by hunting down the healthiest looking of our neighbours by night.  We have a great quantity of salt used to keep our driveway clear of ice in the winter, which I will re-purpose with the freshly killed neighbour carcasses to create delicious and nutritious jerky that should see us through the long, cruel winter.  We can wittle the bones of our former neighbours into useful items for barter . . . arrow heads, fish hooks, sewing needles, etc. and reemerge from the winter with goods to trade to the surviving population around us.

This just made my Day X-D

[huadpe]

A 90% drop in share price absolutely devalues your portfolio. If not, then I'd invite you to sell your portfolio for its (still 100%) value and purchase equivalent shares at 10%.  Of course this wont work.

Of course you loose money if you sell your portfolio when you can only get 10% of what you paid for it. That's exactly what I said: If you do not need to sell shares a 90% drop doesn't affect you that much.

90% is almost by definition an economic collapse, and even those with "safe" jobs may find that they pay almost nothing (deflation) or are unpaid (ridiculously tight money recession where employers simply don't have the cash for payroll).  Sure you could survive through barter, but the stock market doesn't take chickens (maybe poultry futures?).

90% is likely a very deep recession, it's not an economic collapse. I'm not saying that it'll be easy times. I have lost everything and started by zero when my family escaped communist Germany. Have you ever lost everything? My family have experienced periods when bartering was the only way the way to get food. Most of Europe had this experience during war, communism and reign of dictators in the past hundred years. Are we still here? Hell, yes.

Historically, those that owned companies and managed not having to surrender their property to the government were much better of than those that saved cash or didn't own anything at all.

And with regard to unemployment: There was only one year in the past century in the history of the US were the employment rate was below 75%, that was 1933. At least three out of four people aged 14 years or older had a job.

The only 90% drop happened over the period 1929-1933.  So it was accompanied by an economic collapse.  The great depression really was that bad.

Also, you are confusing the employment rate and the unemployment rate.  Unemployment is (people looking for jobs)/(people looking for jobs + people with jobs).  That got to 25% in '33.  The employment rate is (people with jobs) / (people of working age).  We don't have stats for that from the 30s as far as I know, but it would likely have been much higher.  By way of example, the current employment rate is about 58.5%

[Christof]

Thanks for the correction on employment rate. It was meant as a quick calculation to show that even at the worst time there were more poeple who have kept their job than lost their job.

The period of 1929-1933 is profing my point, as far as I am concerned. Someone who regularly bought shares from 1919 throw 1929 (DOW 63-381) would have been back on track by 1938 (DOW 92-194). A year after the crash the DOW was already back to the 1924 value. Only someone who bought all shares at the peak would have had to wait until the 50ties. Even in this time their shares generated dividends.

A 90% drop is an issue when you must sell shares to survive. I would have worried about the war, not my portfoilio.

[huadpe]

Thanks for the correction on employment rate. It was meant as a quick calculation to show that even at the worst time there were more poeple who have kept their job than lost their job.

The period of 1929-1933 is profing my point, as far as I am concerned. Someone who regularly bought shares from 1919 throw 1929 (DOW 63-381) would have been back on track by 1938 (DOW 92-194). A year after the crash the DOW was already back to the 1924 value. Only someone who bought all shares at the peak would have had to wait until the 50ties. Even in this time their shares generated dividends.

A 90% drop is an issue when you must sell shares to survive. I would have worried about the war, not my portfoilio.

I've studied the depression pretty carefully actually.  I don't think it's correct to say that more people kept their jobs than not.  We really don't know for sure, as our statistics are very sketchy from the period.  Many if not most people were employed informally, and the income tax was not applied to most people, and even when applied enforcement was sketchy.  You didn't get a W2 back then.  Your employer just handed you a check (or even cash) and that was it.  But all the evidence we have is that almost everyone was impacted in some form or another.  Many Americans were self-employed farmers who were bankrupted by the triple-impact of falling crop prices, the dust bowl, and bank failures.  They didn't show up in unemployment statistics for the most part.  Likewise, many laborers were on an "as needed" basis, and could maybe pick up a shift every week or two, as opposed to shifts being available daily during the 20s.

The definining characteristic of the depression is a severe shortage of money.  The money supply collapsed drastically.  There were only 3/4 as many dollars around in 1933 as 1929.  Some people made it through the depression OK, but the story of the majority of people in the depression is one of real economic tragedy.

Also, these are US stats, some other countries had it much worse.

[Christof]

What would be interesting are statistics that show the economic impact grouped by wealth or savings. My unscientific guess is that people who suffered most where also those with the least amount invested, or those being leveraged as investors. Saving, if done at all, meant back then keeping cash in a bank. Investing was really only open to a small fraction of society.

Anyone with debt and anyone living paycheck to paycheck would suffer tremendously these days if the DOW dropped 90% despite this being the group that mostly doesn't own shares or only saves in expensive, actively managed funds. My response, however, was strictly about the impact on a portfolio.

[smalllife]

And since January we are force to pay a % more into social security.

Not quite accurate.  During the recession the administration granted a 2% reprieve on the employee portion of FICA (but not the employer) which expired at the end of 2012.   In January the tax level went back to normal, 6.2% for both employee and employer.   There was no increase, just an end to the discount.

[huadpe]

What would be interesting are statistics that show the economic impact grouped by wealth or savings. My unscientific guess is that people who suffered most where also those with the least amount invested, or those being leveraged as investors. Saving, if done at all, meant back then keeping cash in a bank. Investing was really only open to a small fraction of society.

Anyone with debt and anyone living paycheck to paycheck would suffer tremendously these days if the DOW dropped 90% despite this being the group that mostly doesn't own shares or only saves in expensive, actively managed funds. My response, however, was strictly about the impact on a portfolio.

People who kept cash in banks were often devastated by the depression, because the banks failed and there was no FDIC to back up the deposits.  But it all depended if you were in the front of the line at the bank run or the back of the line.

The specific stats you're looking for don't exist as far as I know however.

[dragoncar]

Thanks for the correction on employment rate. It was meant as a quick calculation to show that even at the worst time there were more poeple who have kept their job than lost their job.

The period of 1929-1933 is profing my point, as far as I am concerned. Someone who regularly bought shares from 1919 throw 1929 (DOW 63-381) would have been back on track by 1938 (DOW 92-194). A year after the crash the DOW was already back to the 1924 value. Only someone who bought all shares at the peak would have had to wait until the 50ties. Even in this time their shares generated dividends.

A 90% drop is an issue when you must sell shares to survive. I would have worried about the war, not my portfoilio.

I've studied the depression pretty carefully actually.  I don't think it's correct to say that more people kept their jobs than not.  We really don't know for sure, as our statistics are very sketchy from the period.  Many if not most people were employed informally, and the income tax was not applied to most people, and even when applied enforcement was sketchy.  You didn't get a W2 back then.  Your employer just handed you a check (or even cash) and that was it.  But all the evidence we have is that almost everyone was impacted in some form or another.  Many Americans were self-employed farmers who were bankrupted by the triple-impact of falling crop prices, the dust bowl, and bank failures.  They didn't show up in unemployment statistics for the most part.  Likewise, many laborers were on an "as needed" basis, and could maybe pick up a shift every week or two, as opposed to shifts being available daily during the 20s.

The definining characteristic of the depression is a severe shortage of money.  The money supply collapsed drastically.  There were only 3/4 as many dollars around in 1933 as 1929.  Some people made it through the depression OK, but the story of the majority of people in the depression is one of real economic tragedy.

Also, these are US stats, some other countries had it much worse.

It's cool that you've studied this, and kinda funny how many people are saying they'd "keep investing" in such a situation without a real appreciation for how bad things were/seemed.   I know little about the dust bowl, for example, but it seems like a real "this time it's different" scenario where people aren't sure how we are going to eat for the foreseeable future.

[Christof]

You do realize that I wasn't commenting on the average farmer that just lost everything; I'm not even talking about the average US citizens. I'm specifically talk about us that we save 30-80% of our income, often still have room to spend less, and have invested 5-7 digits sum in index funds, bonds, individual shares, or whatever.

*We* don't have to worry about the market crashing. With our high saving rates we don't need to touch our savings even if 50% of our income vanishes. We (well, many of us) are not debt-laden and desperately need money to pay the next rate. That means it's very likely that we can wait for a year or two until the market goes up, before we even need to think about selling shares.

I've seen so many "this time it's really, really different" and "our situation is completely unprecedented" and never, ever was that the case. Some day I might get surprised that it really happened, but so far there's no evidence that future crashes and booms will be fundamentally different from previous ones.

[huadpe]

You do realize that I wasn't commenting on the average farmer that just lost everything; I'm not even talking about the average US citizens. I'm specifically talk about us that we save 30-80% of our income, often still have room to spend less, and have invested 5-7 digits sum in index funds, bonds, individual shares, or whatever.

*We* don't have to worry about the market crashing. With our high saving rates we don't need to touch our savings even if 50% of our income vanishes. We (well, many of us) are not debt-laden and desperately need money to pay the next rate. That means it's very likely that we can wait for a year or two until the market goes up, before we even need to think about selling shares.

I've seen so many "this time it's really, really different" and "our situation is completely unprecedented" and never, ever was that the case. Some day I might get surprised that it really happened, but so far there's no evidence that future crashes and booms will be fundamentally different from previous ones.

The point I am making is that if we repeated the great depression, your income would very likely vanish.  Farming and laboring were two of the most common occupations in the 1920s.   I'm not saying Great Depression round 2 is likely at all (I make this point upthread), but it's really hard to plan for that kind of disaster.  Unless your job is "federal judge" I wouldn't count on it being secure in the very unlikely event of great depression 2.

[LowER]

And I think I'd look more seriously into tax-loss harvesting too.