Do you have a “Panic Button”?

[earlybird]

If you hold market index-based funds, is there some point at which you’re prepared to dump those funds and wait out an apparent severe market downturn? For example, should one have a predetermined rule that if the Dow Jones drops, say, 20% over two trading days you’ll sell some or all of your market index-based funds and wait to repurchase until after the downturn appears to be over?

[plainjane]

If you hold market index-based funds, is there some point at which you’re prepared to dump those funds and wait out an apparent severe market downturn? For example, should one have a predetermined rule that if the Dow Jones drops, say, 20% over two trading days you’ll sell some or all of your market index-based funds and wait to repurchase until after the downturn appears to be over?

for what purpose?  how would you determine that the downturn was over?
wouldn't the better idea be to buy while stocks are on sale?

I'm sure I saw an analysis at one point that showed that most people who try to do this will miss the biggest days for gains and thus underperform the market.

[Jack]

Nope, because that's an excellent way to buy high and sell low.

If the Dow Jones drops, say 20% over two trading days my predetermined rule is to shovel every extra dollar I can scrounge up (including my emergency fund) into the market.

[Frankies Girl]

Nope. Just in the limited amount of time I've been investing, I've already seen the Chicken Little effect a few times, and pulling out at downturn just means you're doomed to the "buy high and sell low" roller coaster. Even with the 2008 drop, the ones that just held steady recovered within a year or two, so that's pretty much what I plan to do.

[annaraven]

Nope, because that's an excellent way to buy high and sell low.

If the Dow Jones drops, say 20% over two trading days my predetermined rule is to shovel every extra dollar I can scrounge up (including my emergency fund) into the market.

This!

[Will]

From the Berkshire Hathaway 1997 Chairman's Letter (Warren Buffett):

A short quiz: If you plan to eat hamburgers throughout your life and are not a cattle producer, should you wish for higher or lower prices for beef? Likewise, if you are going to buy a car from time to time but are not an auto manufacturer, should you prefer higher or lower car prices? These questions, of course, answer themselves.

       But now for the final exam: If you expect to be a net saver during the next five years, should you hope for a higher or lower stock market during that period? Many investors get this one wrong. Even though they are going to be net buyers of stocks for many years to come, they are elated when stock prices rise and depressed when they fall. In effect, they rejoice because prices have risen for the "hamburgers" they will soon be buying. This reaction makes no sense. Only those who will be sellers of equities in the near future should be happy at seeing stocks rise. Prospective purchasers should much prefer sinking prices.

In answer to your question then: No, because at this stage I am still a purchaser, not a seller.

[LowER]

To plagiarize an adroit investor from another forum; that would just be a RBD (really bad day).  I would consider that a rare opportunity to buy a lot at a discount.  I would not sell and would buy, buy, buy, then say bye, bye, bye to my employer, probably earlier than I had planned, however, you never know where the top or bottom will be.  I have much faith in our system surviving and I base my investments on that.  Since I am in the accumulating phase, the lower the market drops, the better I feel because I invest monthly, sometimes more.  Yes, it's nice to see the account balances growing daily for many months, but the flip side is that I am paying Neiman Marcus prices for Target funds.  No easier answer here. 

As an example, I have accumulated mid 5 figures in cash (0.2% interest account) waiting for a RBD but if I had invested it 6+ months ago, I would be up more than 10% based on earnings in other index funds over the same time frame - so I lost big time on my market timing plan = super fail.

Only hindsight can be your reliable guide.

If anything, as I've heard before, buy when everyone else is panicking and sell when they are cocky, or something much more eloquent than that.

Happy Holidays!!!

[Khan]

I own mostly individual stocks(bad habit, trying to quit/reduce to value/dividend index funds) and no, I don't have a panic button. The main force of my returns is meant to be dividends, and if the stock price tanks and dividends don't, that just means DRIP is all the more effective.

Also:

Peter Lynch
"Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves."
"I can't recall ever once having seen the name of a market timer on Forbes' annual list of the richest people in the world. If it were truly possible to predict corrections, you'd think somebody would have made billions by doing it."

Warren Buffett
"Our stay-put behavior reflects our view that the stock market serves as a relocation center at which money is moved from the active to the patient.­"
"We continue to make more money when snoring than when active."
"The only value of stock forecasters is to make fortune-tellers look good."
"My favorite time frame is forever."

Jonathan Clements
"What to do when the market goes down? Read the opinions of the investment gurus who are quoted in the WSJ. And, as you read, laugh. We all know that the pundits can't predict short-term market movements. Yet there they are, desperately trying to sound intelligent when they really haven't got a clue."

Bernard Baruch
"Only liars manage to always be out during bad times and in during good times."

http://www.cbsnews.com/news/the-smartest-things-ever-said-about-market-timing/

If the market truly does take a massive ****, on the scale of the dot com bust or the financial crash again, then do everything you can to throw money at it. But to think you know how to move in and out to save yourself from most of the damage... I seriously doubt it, and so do all those kings of finance.

[Khan]

To add: I can't find the quote(probably in a book), but Warren Buffett has said something along the lines of: "I've watched my net worth get cut in half 6 times".

That's the difference between staying in or being fearful and cutting your "losses" at the bottom(because YOU FAILED AT MARKET TIMING), the difference between Buffett and Munger, and people that got "burned" in the .com bust and then got burned in the financial crash.

[kpd905]

Sounds like a great way to lose money.  This is the opposite of what you should do.  Put more money in, and rebalance from bonds to buy more stock at a discount.

[earlybird]

Thanks for all the answers so far. Would anyone's opinion change if one has already retired and doesn't have huge sums of cash lying around to invest in a downturn? For example, retired and living off investments. If you had the majority of your net worth in VTSAX and the market dropped precipitously, would you (or should you) have a panic button? And by panic button I mean a particular sell point that you have predetermined so you aren't acting on impulse.

[Khan]

Thanks for all the answers so far. Would anyone's opinion change if one has already retired and doesn't have huge sums of cash lying around to invest in a downturn? For example, retired and living off investments. If you had the majority of your net worth in VTSAX and the market dropped precipitously, would you (or should you) have a panic button? And by panic button I mean a particular sell point that you have predetermined so you aren't acting on impulse.

No. You should be balancing between stocks and bonds and other investment vehicles, and should have enough liquidity available to not have that matter in the short term(say, 1-5 years). I'd go so far as to say that should I be retired, I would have a couple rotating maturity date CD's, or other instruments such that I could always be looking at a ~10k infusion within a 1 year period.

I haven't figured out what FI actually means for myself, how much I need, how much I have, etc as I'm 26 and have an unknown/uncertain(financially) path for the next ~6 years or so, but I'd plan out the safety system quite a bit, and you should have conservative enough system that you could weather a market downturn, while reorganizing asset allocation, and paying for your own living expenses. The more flexible you can be under the 4% rule, the better off you will be, however the 4% rule and a FIRE calculator can show you that *in the US* over any 30 year timeframe, even including terrible periods like the great depression, you would have survived it.

*Unfortunately, the 4% rule doesn't work out quite so nicely for all locales, and as the time frame expands past 30 years, uncertainties become greater.

[SunshineGirl]

Earlybird, do you have an investment plan that tells you how much you are comfortable holding in each investment class? If you made up a guide like that, it could steer you to buy and sell periodically based on the percentage of assets you want and have in a particular asset class rather than in a "panic button" situation.

For instance - and for the sake of simplicity - say you want 50% of your assets in cash-like investments earning 3% and 50% in index funds, and you decide that anytime you're out of that range by more than five percent, you'll buy/sell to get back within that range, then you're making your decision based on a thought-out plan vs. emotion. So say that's your plan, and as of today you have 60% of your funds in index funds and 40% in cash-like investments, then you'd either put all new money into cash until you're back to your 50-50 plan, or you'd sell some of your index funds.

You may want to spend a little time on the Bogleheads forum. There is a wiki there that explains what an investment plan is and why one is so helpful.

[arebelspy]

Thanks for all the answers so far. Would anyone's opinion change if one has already retired and doesn't have huge sums of cash lying around to invest in a downturn? For example, retired and living off investments. If you had the majority of your net worth in VTSAX and the market dropped precipitously, would you (or should you) have a panic button? And by panic button I mean a particular sell point that you have predetermined so you aren't acting on impulse.

No, that's just about the worst thing you could do.

If you're retired, hopefully you have a plan in place (many people use a "bucket" strategy, have cash/cds to live on for X years, often five, to not have to sell when the market is down, cut spending, etc. etc.), but that plan should basically never include "sell equities when the market is down."

[Cyrano]

Thanks for all the answers so far. Would anyone's opinion change if one has already retired and doesn't have huge sums of cash lying around to invest in a downturn? For example, retired and living off investments. If you had the majority of your net worth in VTSAX and the market dropped precipitously, would you (or should you) have a panic button? And by panic button I mean a particular sell point that you have predetermined so you aren't acting on impulse.

No. If you need the money in the next 10 years, put it someplace besides the stock market. (Reasonable people could make that number at short as 7 or as long as 15.) The point is to have enough money in less volatile investments that you're never forced to sell low to pay bills.

[Khan]

Thanks for all the answers so far. Would anyone's opinion change if one has already retired and doesn't have huge sums of cash lying around to invest in a downturn? For example, retired and living off investments. If you had the majority of your net worth in VTSAX and the market dropped precipitously, would you (or should you) have a panic button? And by panic button I mean a particular sell point that you have predetermined so you aren't acting on impulse.

No, that's just about the worst thing you could do.

If you're retired, hopefully you have a plan in place (many people use a "bucket" strategy, have cash/cds to live on for X years, often five, to not have to sell when the market is down, cut spending, etc. etc.), but that plan should basically never include "sell equities when the market is down."

Bucket strategy... thanks for putting the word to it, now I can go on a wiki-safari for a couple hours!

[aj_yooper]

Rick Ferri says that if you have a panic about the market being down, you are over invested in equities.  Bump up the fixed income, but of course, not when the market is off.

[arebelspy]

Bucket strategy... thanks for putting the word to it, now I can go on a wiki-safari for a couple hours!

No problem!  Googling bucket retirement will give you lots of reading.  :)

[TLV]

I read a suggestion recently (can't remember where) that if the earnings yield on stocks (ie 1 divided by the P/E) is less than half the yield on 10-year treasury bonds then it's time to get out of stocks, because it would be incredibly unlikely for stock earnings to grow quickly enough to beat that much of a yield disadvantage plus the frictional costs (taxes) of switching. I believe that situation has only come up a handful of times in history, though, such as 2000 and 2007 when stock prices skyrocketed just before crashing.

[earlybird]

I'll be googling bucket investments shortly, but I have one last question. Did any of you ride the market all the way to the bottom when it tanked in 2007/8?

[matchewed]

Yep, even ramped up my investing. The markets will swing, what matters is that you don't.

[oldladystache]

I rode it all the way down, then back up again. I'll admit it made me nervous.

[arebelspy]

I'll be googling bucket investments shortly, but I have one last question. Did any of you ride the market all the way to the bottom when it tanked in 2007/8?

Of course.

[pachnik]

I'll be googling bucket investments shortly, but I have one last question. Did any of you ride the market all the way to the bottom when it tanked in 2007/8?

Yes, I went to the bottom in 2007/2008.  One thing I remember about this drop was sitting at work and talking about it with a co-worker.  She told me how far her and her husband's investment account had dropped and mine was about the same drop.  I found this strangely comforting - knowing that I wasn't alone and that it wasn't because I had done a bad job of investing.  Everyone was in the same boat.

I had been through drops before and I did panic and sell once.  After that panic, I decided that I would never panic and sell again after a drop and I haven't. 

Unlike some other posters here, i didn't have the courage then to add to my investments right at the time of the drop. Next time there is a drop I will probably take from my cash and add more to the index funds. 

[earlybird]

Thanks everyone! Happy, prosperous New Year to us all!

[plainjane]

I'll be googling bucket investments shortly, but I have one last question. Did any of you ride the market all the way to the bottom when it tanked in 2007/8?

Yes, contributing money into my retirement funds all the way through.  We had some extra money during that time and I admit that we threw it at the mortgage instead of to investments, but I'm not the only one in this relationship, and I have the higher risk tolerance.

It's a bit disheartening to see one's entire contribution go in and still be down month over month, but I just reminded myself that everything was on sale, and we were lucky that we were in a financial situation where we could contribute still.

We did the same through the crash before too, though that was less meaningful because we had so little invested at that point.

[CanuckExpat]

Earlybird, I think you got your answer regarding a "panic button": No, don't do it, bad idea.

Your posts though make me wonder if you need to re-examine your asset allocation and see if it is right for your risk tolerance:
http://www.bogleheads.org/wiki/Asset_allocation
http://www.bogleheads.org/wiki/Risk_and_return#Assessing_risk_tolerance

[Cyrano]

A more nuanced answer: the equity decline that you don't recover from is the 100% decline. If you are legitimately concerned about that, there's a place for panic selling. It has happened in a few countries during the 20th century, Russia, China, Argentina, Egypt. So if revolutionaries who promise to nationalize everything are winning a violent civil conflict, panic selling from your equity portfolio may be prudent. But Tea Party exaggerations notwithstanding, 2007 was not that year.

[kyleaaa]

This was actually popular in the 80s. It was called "portfolio insurance" and it caused the huge crash in 1987, which to this day is still by far the single worst one-day loss in stock market history (-22.61% on October 19th, 1987). Needless to say, it's a bad idea and nobody does it anymore for very good reason.

[Jack]

A more nuanced answer: the equity decline that you don't recover from is the 100% decline. If you are legitimately concerned about that, there's a place for panic selling. It has happened in a few countries during the 20th century, Russia, China, Argentina, Egypt. So if revolutionaries who promise to nationalize everything are winning a violent civil conflict, panic selling from your equity portfolio may be prudent. But Tea Party exaggerations notwithstanding, 2007 was not that year.

Yeah, in that situation you want to be "invested" in ammo and non-perishable food. Maybe something like gold or Bitcoin too. In US/Canada/Australia/Western Europe it's probably not a scenario to be too worried about.

[prestojx]

If you need a panic button, your equity allocation is too high.

[Khan]

If you need a panic button, your equity allocation is too high.

This. If you can't stand the heat, you need to have put a couple layers of insulating foam(bonds, reits, any other asset type) into your portfolio.

I'll be googling bucket investments shortly, but I have one last question. Did any of you ride the market all the way to the bottom when it tanked in 2007/8?

I wish I could say what the others have.. but I can't. I wasn't tested in that crash, I came out of 2009 with my first return from deployment, and a lot of cash that I then had to learn what to do with. I ended up putting it in SPY, and catching the bull correction upwards.

What I can say, is that looking back at 2007/2008, there was blood all over the streets, and I wish I knew what I know now then. If there was ever a time to go absolutely all in, it was then. What would you have lost? If it had gotten any worse, your money wouldn't have been worth anything anyways!