Author Topic: total market crash - what's the plan?  (Read 11258 times)

scrubbyfish

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total market crash - what's the plan?
« on: January 18, 2014, 08:31:39 PM »
I don't mean to sound asinine, please bear with me here. I'm quite embarrassed to have to ask, to not be able to figure it out on my own. This is a genuine question that I must have answered before I proceed to move my life savings from a relatively secure product.

In this relatively secure product, if there were a total market crash, my principle ($100k) would still be available, albeit only via monthly payments.

Outside of these products, what is the (MMM) plan should the market crash? Where do we get our money from after that? I save well, but my income has been extremely low for all but two years of my life. My 100K + is a result of several flukes plus serious strategizing. And not blowing it.

If the market crashed, would all the programmers/engineers simply go back to work for 6-7 years and be back where they were before the crash? Would I, on the other hand, be relying on flukes to recover all my fluke money?

Please explain to me how the worst case scenario of a total market crash plays out in MMM land :)

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Re: total market crash - what's the plan?
« Reply #1 on: January 18, 2014, 08:46:45 PM »
Quote
what is the (MMM) plan should the market crash?

buy buy buy buy buy buy buy buy buy buy buy buy buy buy buy

Kriegsspiel

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Re: total market crash - what's the plan?
« Reply #2 on: January 18, 2014, 08:55:15 PM »
If you are 100% invested in stocks, you'd just have to ride it out, buying more cheap stocks with your monthly paycheck (in the accumulation stage). If you have diversified your investments, you might rebalance into stocks from your other investments also.

Russ

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Re: total market crash - what's the plan?
« Reply #3 on: January 18, 2014, 08:57:47 PM »
I don't know exactly how it plays out, but if there's a market crash such that I literally don't have enough money to live on there will be bigger problems than just a down economy. And if it's really that bad, your relatively secure product might not be as secure as you think.

Either way, the blog is just as much about resilience in those down times so that you can at least get by (which may be better than most)

Birchwood

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Re: total market crash - what's the plan?
« Reply #4 on: January 18, 2014, 09:12:59 PM »
It all depends how bad it is! Do you mean a stock market crash or a real depression like 1929?
If it is a bear market in stock, just live with it, and even, buy stocks if you have money. It will get better.

Another Reader

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Re: total market crash - what's the plan?
« Reply #5 on: January 18, 2014, 09:30:47 PM »
In your situation, it would probably be best to keep a portion of your money in safe, liquid investments.  If you own stocks (or stocks in mutual funds) that pay dividends, most of them will continue to pay some or all of the dividend in a stock market crash.  As long as the business continues to operate and produce income, you will probably receive your share.  Other than banks, that's what happened in the 2008 crash.  If your dividends are reinvested, your dividend income will buy more shares.  If the dividends are used as part of your income, the income should not suffer as much as the underlying value of the stock.

If there is a huge economic disaster, having money with an insurance company is not safe.  Several major insurance companies came very close to failing in October 2008.  AIG did fail.  Generally, in the US, FDIC-insured bank deposits and US treasury bills and notes are the most secure paper instruments.  Not sure about Canada.

Having multiple streams of income also helps.  People with jobs or unemployment insurance generally continue to pay their rent in bad times.  The values of my rentals dropped dramatically between 2007 and 2011, but the rent checks still arrived in the mail. As people lost houses in foreclosure, demand for rentals actually went up.   I had FDIC insured CD's paying over 5 percent.  Goods and services you can sell will probably still have some demand for them, although the business income may decline. 

What you do is cobble together enough income to survive, keeping some supplemental money in safe and accessible accounts to smooth things out, and avoid selling your assets when their values go down.  When things start to improve, you take any increase in your income and buy assets that are still depressed. 

CDP45

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Re: total market crash - what's the plan?
« Reply #6 on: January 18, 2014, 10:41:51 PM »
buy buy buy buy buy buy buy buy buy buy buy buy buy buy buy buy buy buy buy buy buy buy buy buy buy buy buy buy buy buy buy buy buy buy buy buy buy buy buy buy buy. Profit!

Jamesqf

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Re: total market crash - what's the plan?
« Reply #7 on: January 18, 2014, 10:56:27 PM »
And buy some more :-)  It's what I did after '08.  Oh, and remember the other part: DON'T PANIC SELL.

Now if you're talking about somthing majorly worse than '08, like a total collapse of society... Well, that's why the garden, the rifle & 1000 rounds, etc.

Will

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Re: total market crash - what's the plan?
« Reply #8 on: January 18, 2014, 11:10:28 PM »
It is doubtful there would ever be a "total market crash" and like the others have said, if there is, then your plan would be how to survive the zombie apocalypse. 

FIreDrill

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Re: total market crash - what's the plan?
« Reply #9 on: January 18, 2014, 11:20:54 PM »
I'd be buying as much as I could.  In the 2008 crash I was 18 and had no money but wished I could have dumped a couple thousand into the market.  If I was Mustachian back then I would of found a way to put money into the market but I was probably only a little better than your typical consumer.  So glade I found MMM and am out of that stage.....

scrubbyfish

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Re: total market crash - what's the plan?
« Reply #10 on: January 18, 2014, 11:33:49 PM »
This is AWESOME.

So glad I asked. So much I didn't know!!

I will ponder my situation in light of all these thoughts.

I'm definitely very good at figuring out ways to get by, ensuring multiple streams of income, living on little, living on "impossibly little", etc. Some of my extreme measures, implemented pre-kid, I would not want to impose on my kid but I can make a "worst case" plan with him in mind. (Or "second to worst case", worst case being the zombies.)

Yes, I think SunWise -the company insuring my money- fell apart a couple of years ago, and lots of people lost their investments with them, or so said one of their reps I knew personally. Mine survived it. Don't know why/what happened there (or really if I even heard correctly).

I'm also looking at developing a second career for when my son leaves the nest. Raising him is my focus right now, but I also want to have a new skill set ready for when he is independent, which is really only a few years away. While I'm raising him I'm nervous of a situation forcing me back into full-time work. He has disabilities and has done wildly better since I shifted to less work, homeschooling, etc.

backyardfeast

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Re: total market crash - what's the plan?
« Reply #11 on: January 19, 2014, 12:07:29 AM »
Lots of food for thought here.  But just in response to the "buy buy buy" answers...pointing out the obvious that there are 2 possible scenarios.

#1: I'm still working but my investments are now worth much less.  This is when we remember that market value is only relevant when we have to sell; if we don't have to sell (because we're still working), buying more is good.

#2: I'm living off investments...ouch! This is where the dividend and multiple income streams, etc make sense.  Then we don't HAVE to sell, and we can wait out the disasters.  (and of course, if you're actually or close to retirement, conventional wisdom says stay out of equities) And where other forms of wealth (skills, networks, etc) are worth much more.  I also see the value (and am thinking about) having more actual hard cash around for this scenario.  During an actual crash, this is where the credit world freezes, bank assets are frozen or banks closed to prevent bank runs, etc, and those of us who depend on debit cards and computer assets and virtual/credit emergency funds can run into trouble.

Just food for thought.

wtjbatman

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Re: total market crash - what's the plan?
« Reply #12 on: January 19, 2014, 12:38:08 AM »
#2: I'm living off investments...ouch! This is where the dividend and multiple income streams, etc make sense.  Then we don't HAVE to sell, and we can wait out the disasters. (and of course, if you're actually or close to retirement, conventional wisdom says stay out of equities)

Be careful there. Abandoning equities when you are near or in retirement seems like one surefire way to find out how your carefully prepared retirement plans can fall apart. "But... my calculator says I was going to be able to withdraw 4% indefinitely!" Unless you've already taken the reduced return into account when planning your allocation switch, in which case good job, lol.

Blindsquirrel

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Re: total market crash - what's the plan?
« Reply #13 on: January 19, 2014, 08:35:09 AM »
   It depends is a good answer. Bear markets can last quite a long time. Crashes are short in duration. The longest bear running right now is the Nikkei (JP Dow) Does the market always come back? Investors in the Nikkei 225 are still wondering. On Dec. 29, 1989, the Japanese analogue to the Dow Jones Industrial Average reached an all-time intraday high of 38,957. Two decades later, the Nikkei's value was still 73% below that mark.http://www.dailyfinance.com/2013/12/29/the-beginning-of-the-longest-bear-market-in-modern/   The dividend yield rate will rise when prices fall. In a 40-50 year retirement, there will be some ups and downs I would say. We have a hedge of paid off real estate (generates enough to cover our expenses after expenses) as well as some leveraged real estate at fixed interest rates. When the financial crises hit I bought AIG, C, and BAC since they were getting 0% cash from the US gov. They have generated outstanding returns. In retrospect, I did not buy nearly enough. Stocks have a mathematical tendency called reversion to the mean and when P/E is well below the mean, buy if your time horizon is long. Current bull market is getting long in the tooth by most measures and US stocks are not cheap by any measure. I think.

Jamesqf

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Re: total market crash - what's the plan?
« Reply #14 on: January 19, 2014, 11:55:16 AM »
The longest bear running right now is the Nikkei (JP Dow) Does the market always come back? Investors in the Nikkei 225 are still wondering.

That's why we diversify :-)

CopperTex

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Re: total market crash - what's the plan?
« Reply #15 on: January 19, 2014, 06:03:42 PM »
The longest bear running right now is the Nikkei (JP Dow) Does the market always come back? Investors in the Nikkei 225 are still wondering.

That's why we diversify :-)

Also seems why having a paid off mortgage would make sense to the early retiree

dragoncar

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Re: total market crash - what's the plan?
« Reply #16 on: January 19, 2014, 06:36:00 PM »
To all the people saying "buy buy buy," I'll tell you what:  I didn't "buy buy buy" in 2008 because I was too worried I wouldn't have a source of income with which to buy (in which case, owning those falling stocks would be disastrous on my ability to meet my basic living expenses).  And even though my employment situation worked out in the end, I think I made the right decision.

In this hypothetical "total market crash," many people will be losing their jobs.

scrubbyfish

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Re: total market crash - what's the plan?
« Reply #17 on: January 19, 2014, 07:09:47 PM »
Do I have this right?

Some stocks simply go up in value.
Some stocks pay cash dividends monthly.
Some stocks create dividends, but the holder has them set to automatically purchase more of the same stock.
Monthly cash dividends may well continue to pay in a bear market but quite possibly less than usual, so a person relying on dividends for part of their monthly living income needs to be cautious here.
If in a bear market a person loses his job and needs a replacement source of money, he is best to avoid his stocks being that source because the value will be temporarily lowered (depending on the stock, of course).

wtjbatman

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Re: total market crash - what's the plan?
« Reply #18 on: January 19, 2014, 07:38:27 PM »
Do I have this right?

Some stocks simply go up in value.
Some stocks pay cash dividends monthly.
Some stocks create dividends, but the holder has them set to automatically purchase more of the same stock.
Monthly cash dividends may well continue to pay in a bear market but quite possibly less than usual, so a person relying on dividends for part of their monthly living income needs to be cautious here.
If in a bear market a person loses his job and needs a replacement source of money, he is best to avoid his stocks being that source because the value will be temporarily lowered (depending on the stock, of course).

With any stock that pays dividends, you can either have them reinvested automatically or collect the cash, depending on where you hold the stocks (what brokerage). The dividends are never automatically reinvested though, taking them as a payout should always be possible. What dividend investors commonly do is either have dividends reinvested in the same stock (if it's a good stock that you want to own more of), or collect them until they have enough money to purchase new stocks/additional stock. Dividends are also generally considered a safer bet during a bear market, as stock values may be dropping but mature companies and blue chip stocks almost never cut their dividend (I believe 10% of the S&P 500 cut their dividend in 2008/2009, while at least 90% of the S&P 500 lost value). Some feel that dividend stocks don't give as good of a total return during a bull run however.

thepokercab

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Re: total market crash - what's the plan?
« Reply #19 on: January 19, 2014, 07:54:19 PM »
Quote
To all the people saying "buy buy buy," I'll tell you what:  I didn't "buy buy buy" in 2008 because I was too worried I wouldn't have a source of income with which to buy (in which case, owning those falling stocks would be disastrous on my ability to meet my basic living expenses).  And even though my employment situation worked out in the end, I think I made the right decision.

+1

I see these responses as well, and apparently these people must have a job or steady stream of income that is completely independent of how the market performs, or the economy in general. I suppose that could be some jobs. Owning real-estate, or rental properties is probably one way.  So they can afford to plow excess income and savings into the market.  I was lucky to maintain employment during and through the 08 meltdown.  I probably won't be FI when the next crash hits, so I'll need to make sure that my employment situation is relatively stable before I dump excess cash into the market. 

I thought that MMM had a good take on this as well:

http://www.mrmoneymustache.com/2013/05/07/how-to-prosper-in-an-economic-boom/

Basically, not letting life style inflation creep in when the good times are rolling.  Obviously, not advice that most people here need, but I find it comforting that we're living the frugal lifestyle now, and that we know we can survive when the bad times hit.  Another part of my "plan" when the next crash hits. 

Another Reader

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Re: total market crash - what's the plan?
« Reply #20 on: January 19, 2014, 08:01:40 PM »
You do not want to sell the assets that produce the income or in fact any assets while the values are depressed.  That's the reason that in your case, having some cash and CD's for part of your money at this point likely makes sense.  You can put off or avoid entirely having to sell assets at low values.  If you lose your job, you can use a combination of unemployment, side gigs when the unemployment runs out, and your cash to get by until things improve.

I personally ALWAYS keep three years of living expenses above and beyond my pensions and a percentage of the net rental income in cash and easy to access accounts that are not likely to decline in value much.  I never want to be in a position where I have to sell a house or some stock at a low value.

Some stocks do not pay dividends.  If you buy such a stock, you are relying on the company to reinvest the profits in the business so that the value of the business and therefore the value of the stock goes up.  Other companies throw off some of their profits in the form of dividends and reinvest the remaining profits back into the business.

You can automatically reinvest mutual fund dividends and capital gains if you choose.  With stocks, some brokers allow you to reinvest the dividends, others do not.  Dividends are usually paid quarterly.

Dividends can go up or can be reduced if the business declines.  Solid companies rarely reduce or suspend dividends.  However, if you relied on bank stock dividends for income, you would have been hurt badly in the 2008 crash.  Diversifying dividend paying stocks is helpful here.

scrubbyfish

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Re: total market crash - what's the plan?
« Reply #21 on: January 19, 2014, 08:49:42 PM »
Another Reader, thank you!!!!!

Blindsquirrel

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Re: total market crash - what's the plan?
« Reply #22 on: January 20, 2014, 06:12:49 AM »
   Spot on Another Reader. Incidentally, the process of withdrawing living expenses when the market implodes is called "Dollar Cost Ravaging."  :/ Try your retirement math with an average bear market 22 mo long and 25% deep. The paid off house is very important as that is income you do not have to generate/ withdraw/get taxed on.

SnackDog

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Re: total market crash - what's the plan?
« Reply #23 on: January 20, 2014, 06:31:32 AM »
Define "total market crash".  Is it a 1929 pull back for 10 years? A 2008 dip for one year?  A 1965 stagflation decade? Or something worse related to the confluence of decades of trade imbalance, deficit spending and social entitlements (e.g. US bankruptcy)?  If you are a few decades from retirement, borrow all the money you can to buy stock in this situation. If you are retired, start polishing up the resume...

Ottawa

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Re: total market crash - what's the plan?
« Reply #24 on: January 20, 2014, 06:37:06 AM »
No change in plan!  The reason we are here at this blog and learning the Mustachian mindset is to acquire the skills to become financially independent.  We do this by adopting a skill/mindset to live well below our means.  A large part of this comes from learning to fix shit and make stuff ourselves.  This results in keeping those dollars, otherwise spent, in our pocket. 

We invest these dollars in return for the freedom to pursue the things that make us happy, since we have learned this is the only way to buy happiness.  We invest passively and unemotionally.  We take comfort in the 4% rule because its historical application shows us that it works! 

A nice little paper I recently read here may comfort you!  http://www.retailinvestor.org/pdf/Bengen1.pdf

lackofstache

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Re: total market crash - what's the plan?
« Reply #25 on: January 20, 2014, 10:37:06 AM »
No change in plan!  The reason we are here at this blog and learning the Mustachian mindset is to acquire the skills to become financially independent.  We do this by adopting a skill/mindset to live well below our means.  A large part of this comes from learning to fix shit and make stuff ourselves.  This results in keeping those dollars, otherwise spent, in our pocket. 

We invest these dollars in return for the freedom to pursue the things that make us happy, since we have learned this is the only way to buy happiness.  We invest passively and unemotionally.  We take comfort in the 4% rule because its historical application shows us that it works! 

A nice little paper I recently read here may comfort you!  http://www.retailinvestor.org/pdf/Bengen1.pdf

Well stated.

scrubbyfish

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Re: total market crash - what's the plan?
« Reply #26 on: January 20, 2014, 11:05:26 AM »
I totally get the MMM/YMOYL lifestyle thing, that part I do understand. Perhaps my original question would have been better stated: If we put *all* our money into the stock market, what are we living on and replenishing our finances with during a crash (of any definition)? Happily, folks were able to intuit the more specific question under my OP, and I'm really excited to be reading answers to that! i.e., Strategies such as having a few years worth of assets kept in more secure options to be able to ride that period and possibly even buy. Great stuff! My plan is formulating...

Another Reader

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Re: total market crash - what's the plan?
« Reply #27 on: January 20, 2014, 11:09:41 AM »
Ottawa:  That's a lot of hand waving and generalization in my book.  High income folks with saleable skill sets that start investing early with a very high savings rate can quickly insulate themselves from the vicissitudes of the economy.   People with more ordinary incomes that have faced financial hardships need to do things differently, at least at first.  They will need to insure themselves against disaster for a longer period of time with cash savings because they have a higher risk of losing everything with even minor setbacks. 

The OP is a single parent of a child with disabilities and her income is from a business that is at risk of being destroyed by competitors.  If she loses her job, she needs cash to survive.  Buying more stock in a down market won't be on the table.  Over time, as she saves and invests more, she will build up her stash and the insulation from financial disaster.  At that point, she can afford to be complacent about an economic downturn.

LowER

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Re: total market crash - what's the plan?
« Reply #28 on: January 20, 2014, 11:23:33 AM »
Buy buy then bye bye…..

Blindsquirrel

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Re: total market crash - what's the plan?
« Reply #29 on: January 20, 2014, 12:50:34 PM »
   Spot on again Another Reader. If you do not have a large buffer built between you and being broke, risk and market volatility can be horrors. If you are the sole bread winner, with your income at risk, you do need to be very careful. To go horribly off topic, what stuns me is how close to the edge of financial ruin some people tread due to their consumption habits. If you are the sole support of your family, you do not need to buy a GD $48,000 truck when your gross income is $50K.  I have a number of tenants who nearly always pay late fees and some who are always broke, despite having verified high incomes.  The crap they buy and the lifestyle they lead boggles my mind. For the OP, you are ahead of the game from a mental stand point just by being on this board.

Nothlit

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Re: total market crash - what's the plan?
« Reply #30 on: January 20, 2014, 03:21:47 PM »
Perhaps my original question would have been better stated: If we put *all* our money into the stock market, what are we living on and replenishing our finances with during a crash (of any definition)?

I think the bottom line is you should almost never put 100% of your money into the stock market. If you read sites like Bogleheads.org you'll see they recommend choosing an asset allocation comprised of at least some bonds in addition to stocks (and possibly other asset classes). In theory, bond prices have an inverse correlation to stock prices (although this is not perfectly so). That helps to dampen the volatility of a pure stock-based portfolio.