Author Topic: Let's assume the stock market craters.... Anything you can do?  (Read 11460 times)

Roboturner

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Let's assume the stock market craters.... Anything you can do?
« on: December 07, 2015, 11:01:37 AM »
Like to get discussion/advice about if there is anything you can/should do during a major stock market downturn to stem the bleeding a little.

Is there anything you can do? up your bond exposure? what did you do during 2008/2000/late 80's, if anything?

Curious...thanks!
« Last Edit: December 07, 2015, 11:05:02 AM by Roboturner »

BarkyardBQ

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Re: Let's assume the stock market craters.... Anything you can do?
« Reply #1 on: December 07, 2015, 11:03:51 AM »
Get a job and buy more.

Roboturner

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Re: Let's assume the stock market craters.... Anything you can do?
« Reply #2 on: December 07, 2015, 11:05:26 AM »
Get a job and buy more.

How about with your current holdings?

BarkyardBQ

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Re: Let's assume the stock market craters.... Anything you can do?
« Reply #3 on: December 07, 2015, 11:16:35 AM »
It really depends on the situation. I can't predict whether bonds or stocks will be worth buying during such an event. We don't currently hold bonds and don't plan to. However, our IPS says during a decrease in value we should do what we can to buy more. This would mean not selling, and taking any other income-(expenses) and using it to buy more stocks.

We also will not depend on any 1 single source of income for our FIRE plan. For the same reason it's advantageous to be FI if you were to get laid off, it's smart to have multiple sources of income in retirement. There are unlimited possibilities for generating enough passive or part-time income to handle basic living expenses.

edit: during accumulation phase (pre-FIRE), would just keep investing with regular contributions. The dip this August gave us about 5% returns on contributions invested August-October. Played with contribution elections a bit to buy a little more of the most depreciated fund.
« Last Edit: December 07, 2015, 11:22:01 AM by BackyarBQ »

arebelspy

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Re: Let's assume the stock market craters.... Anything you can do?
« Reply #4 on: December 07, 2015, 11:19:11 AM »
Rebalance. Stay the course.
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fattest_foot

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Re: Let's assume the stock market craters.... Anything you can do?
« Reply #5 on: December 07, 2015, 11:31:59 AM »
Get a job and buy more.

How about with your current holdings?

Isn't the whole point that you keep your current holdings where they are?

In this other thread about bonds (http://forum.mrmoneymustache.com/investor-alley/'why-you-shouldn't-substitute-stocks-for-bonds'/) I brought up the same thing. Putting money into bonds to shelter you from the volatility of equities is just timing the market. Are you going to somehow manage to figure out exactly when the market is going to end its downturn and head into a bull? If not, leave your money where it is.

I think this is pretty much the summary of Jeremy's 100% equities piece. Any money you're putting into bonds is money that will miss potential gains in the market. Will you get hit by all the downturns as well? Absolutely. But since the market always trends up, you'll come out ahead.

2Birds1Stone

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Re: Let's assume the stock market craters.... Anything you can do?
« Reply #6 on: December 07, 2015, 11:47:31 AM »
Rebalance. Stay the course.

^ doing anything else will likely result in buying high and selling low.

Rubic

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Re: Let's assume the stock market craters.... Anything you can do?
« Reply #7 on: December 07, 2015, 11:55:53 AM »
"Buy when there's blood in the streets, even if the blood is your own."
  - Baron Rothschild

Unfortunately I couldn't talk any family members into buying stocks in 2009, though I was able to get a couple of friends invested in Vanguard funds that year -- possibly due to my overbearing persistence on the topic.


seattlecyclone

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Re: Let's assume the stock market craters.... Anything you can do?
« Reply #8 on: December 07, 2015, 12:14:06 PM »
Rebalance. Stay the course.

Indeed. Your bond allocation will likely be ahead of your desired amount. Sell some bonds to buy more stocks and keep your asset allocation the way you want it.

Tyler

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Re: Let's assume the stock market craters.... Anything you can do?
« Reply #9 on: December 07, 2015, 01:20:53 PM »
Rebalance. Stay the course.

+1

The time to reevaluate your AA is before the crash, not after.  Not every portfolio craters along with the stock market.

Jack

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Re: Let's assume the stock market craters.... Anything you can do?
« Reply #10 on: December 07, 2015, 03:18:35 PM »
And even if your portfolio does crater, who cares? As long as you're not all-in on some individual stock that goes bankrupt, you still own the index fund shares and their value will come back sooner or later.

adamwoods137

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Re: Let's assume the stock market craters.... Anything you can do?
« Reply #11 on: December 07, 2015, 05:30:07 PM »
Like to get discussion/advice about if there is anything you can/should do during a major stock market downturn to stem the bleeding a little.

Is there anything you can do? up your bond exposure? what did you do during 2008/2000/late 80's, if anything?

Curious...thanks!

The reason you aren't getting any satisfying answers in this thread is that you have asked a very dangerous question.  Optimal behavior during stock market downturns is to buy more stocks.  This is emotionally unsatisfying. In general people don't like losing money, even on paper.  The goal of "doing something" during downturns has cost investors a tremendous amount of money in aggregate.  You aren't seeing a lack of creativity in this thread.  Nobody here likes losing money.  This just happens to be one of those situations where the perfect is the enemy of the good.  Trying to optimize further than buy and hold usually results in underperformance, occasionally bankruptcy, but only very rarely outperformance. 

mrpercentage

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Re: Let's assume the stock market craters.... Anything you can do?
« Reply #12 on: December 07, 2015, 05:52:49 PM »
Future purchases could go into the aristocrats. Reality income is a great start because it provides some monthly income. Exposure to these is a great way to hedge your withdrawal rate. Obviously you would need to diversify into a dozen stocks. It would help a lot. If half of your portfolio was coming from stocks paying around a 4% annual dividend it would greatly reduce shares sold at a cut throat rates. You can't really do anything if you are already in the crater as any moves would be realizing serious loss and maybe paying a hefty tax bill to suit-- and if you are wrong making it even worse. Your portfolio should be proactive not reactive.

So dividends if you are retired. Quality dividends around 4%. If you are a hedge fund you need to look into seasonal explosive growth opportunities. Maybe some individual small caps as it doesn't take much money to really move the stock. Seeing the stock move others jump in on you coat tails and then you scale out a slice at a time careful not to kill its momentum. You still want to pick a good stock. In my simulated games Im doing it with ESCA-- sporting goods are seasonal. Its got a hefty yield for a small cap too at around 2.5%

arebelspy

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Re: Let's assume the stock market craters.... Anything you can do?
« Reply #13 on: December 08, 2015, 02:58:26 AM »

Like to get discussion/advice about if there is anything you can/should do during a major stock market downturn to stem the bleeding a little.

Is there anything you can do? up your bond exposure? what did you do during 2008/2000/late 80's, if anything?

Curious...thanks!

The reason you aren't getting any satisfying answers in this thread is that you have asked a very dangerous question. 

Huh? I thought there were very satisfying answers. ;)
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davisgang90

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Re: Let's assume the stock market craters.... Anything you can do?
« Reply #14 on: December 08, 2015, 04:37:03 AM »
Pull everything out of the market and try to time when it hits bottom.

No wait, that is a terrible idea!  Re balance and stay the course, much better advice.

SpicyMcHaggus

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Re: Let's assume the stock market craters.... Anything you can do?
« Reply #15 on: December 08, 2015, 12:15:53 PM »
Margin loan and double down.

aboatguy

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Re: Let's assume the stock market craters.... Anything you can do?
« Reply #16 on: December 08, 2015, 04:42:16 PM »
Stay the course and continue to buy!

chucklesmcgee

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Re: Let's assume the stock market craters.... Anything you can do?
« Reply #17 on: December 08, 2015, 05:34:29 PM »
Buy Bitcoin.

GGNoob

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Re: Let's assume the stock market craters.... Anything you can do?
« Reply #18 on: December 08, 2015, 06:32:22 PM »
Live as frugal as possible so that you have as much money as possible to buy stocks while the market is down.

JetBlast

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Re: Let's assume the stock market craters.... Anything you can do?
« Reply #19 on: December 08, 2015, 07:53:32 PM »
Hoard gold and hide in your fallout shelter!



Ok, my serious answer is that it depends on your individual situation but stay the course is more often than not the right answer.
« Last Edit: December 08, 2015, 07:56:33 PM by JetBlast »

Heckler

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Re: Let's assume the stock market craters.... Anything you can do?
« Reply #20 on: December 08, 2015, 08:09:16 PM »
TSX at it's lowest in two years today.  I bought!  woot!
« Last Edit: December 08, 2015, 08:11:32 PM by Heckler »

JinBoston

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Re: Let's assume the stock market craters.... Anything you can do?
« Reply #21 on: December 09, 2015, 10:27:08 AM »

This thread is why I think Bogleheads should have a decent understanding of value investing even if they always index and DCA.   Knowing *how dang cheap* stocks are means you are  a lot more comfortable putting more money into the market.   

Roboturner

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Re: Let's assume the stock market craters.... Anything you can do?
« Reply #22 on: December 09, 2015, 10:31:01 AM »
Thanks all, I figured the answer was stay the course and buy more, was just wondering if anyone did anything different in past downturns

Jack

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Re: Let's assume the stock market craters.... Anything you can do?
« Reply #23 on: December 11, 2015, 11:44:22 AM »
Thanks all, I figured the answer was stay the course and buy more, was just wondering if anyone did anything different in past downturns

Oh, you're asking about what we did do, not what we should do?

Well, in 2009 I sat on my ass and watched, wishing I could invest, but that's because I had no extra money at the time. I don't recommend that strategy. (At least I was able to buy a house when they were cheap, but that's because of the marvels of low-down-payment mortgage lending.)

Roboturner

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Re: Let's assume the stock market craters.... Anything you can do?
« Reply #24 on: December 11, 2015, 11:48:18 AM »
Thanks all, I figured the answer was stay the course and buy more, was just wondering if anyone did anything different in past downturns

Oh, you're asking about what we did do, not what we should do?

Well, in 2009 I sat on my ass and watched, wishing I could invest, but that's because I had no extra money at the time. I don't recommend that strategy. (At least I was able to buy a house when they were cheap, but that's because of the marvels of low-down-payment mortgage lending.)

yeah question was for both sides, wish we couldve got in on the low housing, really low everything of 2008-2009...

Bearded Man

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Re: Let's assume the stock market craters.... Anything you can do?
« Reply #25 on: December 11, 2015, 12:10:17 PM »
My retirement is more dependent on real estate than stocks. I also could rent out extra rooms in my house, and I will honestead again to produce much of our own food.

enki

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Re: Let's assume the stock market craters.... Anything you can do?
« Reply #26 on: December 11, 2015, 01:33:51 PM »
I'll continue my plan of squirreling money away and enjoying the sale.

tj

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Re: Let's assume the stock market craters.... Anything you can do?
« Reply #27 on: December 11, 2015, 02:15:12 PM »
The worst time to buy bonds would be if the stock market craters. Pick an asset allocation that you can stick with for the long run.

davisgang90

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Re: Let's assume the stock market craters.... Anything you can do?
« Reply #28 on: December 11, 2015, 05:29:10 PM »
Hoard gold and hide in your fallout shelter!
And seeds!  Hybrid Seeds!

Indexer

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Re: Let's assume the stock market craters.... Anything you can do?
« Reply #29 on: December 13, 2015, 06:04:29 PM »
You are far more likely to make a mistake trying to avoid a loss during a market downturn than you are to do the exact right thing.

Rebalancing your portfolio back into more stocks, or just buying more stocks in general while markets are down is a great way to take advantage of the market downturn. Trying to get out of stocks is normally a very poor decision.

protostache

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Re: Let's assume the stock market craters.... Anything you can do?
« Reply #30 on: December 13, 2015, 07:14:56 PM »
Hoard gold and hide in your fallout shelter!

It's all about those bottlecaps, bro.

Indexer

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Re: Let's assume the stock market craters.... Anything you can do?
« Reply #31 on: December 13, 2015, 07:26:36 PM »
Hoard gold and hide in your fallout shelter!

It's all about those bottlecaps, bro.

YES! Don't forget you nuka cola, blue long johns, and a 10mm pistol. ;)

Kaspian

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Re: Let's assume the stock market craters.... Anything you can do?
« Reply #32 on: December 14, 2015, 11:50:02 AM »

Is there anything you can do? up your bond exposure? what did you do during 2008/2000/late 80's, if anything?


Please refer to your "Personal Investment Policy Statement" (IPS) which you carefully researched, thought out, and wrote down before beginning on your money journey.  The answer should be in there someplace.  Does it state, "If things crater, freak out and buy bonds"?  No?  Waitaminute... You do have a IPS right?
« Last Edit: December 14, 2015, 11:51:39 AM by Kaspian »

CheapskateWife

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Re: Let's assume the stock market craters.... Anything you can do?
« Reply #33 on: December 14, 2015, 11:55:52 AM »
Hoard gold and hide in your fallout shelter!

It's all about those bottlecaps, bro.

YES! Don't forget you nuka cola, blue long johns, and a 10mm pistol. ;)

Tin foil hat anyone?

protostache

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Re: Let's assume the stock market craters.... Anything you can do?
« Reply #34 on: December 14, 2015, 12:12:27 PM »
Hoard gold and hide in your fallout shelter!

It's all about those bottlecaps, bro.

YES! Don't forget you nuka cola, blue long johns, and a 10mm pistol. ;)

Tin foil hat anyone?

Why waste the metal on a hat when you can make some sweet armor mods?

My Own Advisor

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Re: Let's assume the stock market craters.... Anything you can do?
« Reply #35 on: December 14, 2015, 07:07:05 PM »
1. Save cash
2. Get ready to deploy cash coming out of the bottom.
3. Stay invested regardless where the bottom is.
4. Avoid buying lots of bonds.  Yields are horrible. 
5. Go to sleep and relax.

FerrumB5

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Re: Let's assume the stock market craters.... Anything you can do?
« Reply #36 on: December 14, 2015, 07:56:34 PM »
1. Save cash
2. Get ready to deploy cash coming out of the bottom.
3. Stay invested regardless where the bottom is.
4. Avoid buying lots of bonds.  Yields are horrible. 
5. Go to sleep and relax.

Doesn't (1) and (2) contradict the "Don't try to time the market!" motto?
Agreed with 3-4.
Wish I could do (5) on regular basis - partial insomnia since 2009 :(

My Own Advisor

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Re: Let's assume the stock market craters.... Anything you can do?
« Reply #37 on: December 15, 2015, 04:44:48 AM »
I don't think you can predict the bottom, but if the market keeps climbing for days or weeks on end, you're usually out of the bottom.

aj_yooper

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Re: Let's assume the stock market craters.... Anything you can do?
« Reply #38 on: December 15, 2015, 06:31:38 AM »
If the market craters due to deflation, I would avoid all debt and just save, save, save.  If the market cratered as in a 'normal' cycle, rebalance the portfolio and buy more.

arebelspy

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Re: Let's assume the stock market craters.... Anything you can do?
« Reply #39 on: December 15, 2015, 06:35:36 AM »
If the market craters due to deflation, I would avoid all debt and just save, save, save.  If the market cratered as in a 'normal' cycle, rebalance the portfolio and buy more.

Why would you not be buying more if deflation was the cause?  I mean, yeah, cash is king, IF you can time things--I.e. you know when it'll bottom.  If you don't, might as well DCA through the down, and back up.
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aj_yooper

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Re: Let's assume the stock market craters.... Anything you can do?
« Reply #40 on: December 15, 2015, 08:03:27 AM »
If the market craters due to deflation, I would avoid all debt and just save, save, save.  If the market cratered as in a 'normal' cycle, rebalance the portfolio and buy more.

Why would you not be buying more if deflation was the cause?  I mean, yeah, cash is king, IF you can time things--I.e. you know when it'll bottom.  If you don't, might as well DCA through the down, and back up.

If one were committed to asset allocation and rebalancing, that is what one would do.  But...

This is from Irving Fisher at: https://fraser.stlouisfed.org/docs/meltzer/fisdeb33.pdf    I was unable to accurately quote all of his comments, but this is the gist  of his description of deflation.

"27. In actual chronology, the order of the nine events is somewhat different from the above "logical" order, and there are reactions and repeated effects. As stated in Appendix I of Booms and Depressions:
The following table of our nine factory, occurring and recurring (together with distress selling), gives a fairly typical, though still inadequate, picture of the
1 Many of these interrelations have been shown statistically, and by many writers. Some, which I have so shown and which fit in with the debt-deflation theory, are: that price-change, after a distributed lag, causes, or is followed by, corresponding fluctuations in the volume of trade , employment, bankruptcies, and rate of interest. The results as to price-change and unemployment are con- tained in Charts II and III, pp. 352-3. See references at the end of this article; also footnote 2, page 345, regarding the charts.
Digitized for FRASER http://fraser.stlouisfed.org/
Federal Reserve Bank of St. Louis
IRVING FISHER 343
cross-currents of a depression in the approximate order in which it is believed they usually occur. (The first occurrence of each factor and its sub-divisions is indicated by italics. The figures in parenthesis show the sequence in the original exposition.)
,,,
Mild Gloom and Shock to Confidence Slightly Reduced Velocity of Circulation Debt Liquidation
Money Interest on Safe Loans Falls
But Money Interest on Unsafe Loans Rises
Distress Selling
More Gloom
Fall in Security Prices More Liquidation
Fall in Commodity Prices
Real Interest Rises; REAL DEBTS INCREASE More Pessimism and Distrust
More Liquidation
More Distress Selling
More Reduction in Velocity
More Distress Selling
Contraction of Deposit Currency
Further Dollar Enlargement
Reduction in Net Worth Increase in Bankruptcies More Pessimism and Distrust More Slowing in Velocity More Liquidation
Decrease in Profits Increase in Losses Increase in Pessimism Slower Velocity
More Liquidation
Reduction in Volume of Stock Trading
Decrease in Construction Reduction in Output Reduction in Trade Unemployment
More Pessimism
Hoarding
Runs on Banks
Banks Curtailing Loans for Self-Protection Banks Selling Investments
Bank Failures
Distrust Grows
More Hoarding
More Liquidation
More Distress Selling
Further Dollar Enlargement"

And later he writes: 

"And, vice versa, deflation caused by the debt reacts on the debt. Each dollar of debt still unpaid becomes a bigger dollar, and if the over-indebtedness with which we started was great enough, the liqui- dation of debts cannot keep up with the fall of prices which it causes.
In that case, the liquidation defeats itself. While it diminishes the number of dollars owed, it may not do so as fast as it increases the value of each dollar owed. Then, the very effort of individuals to lessen theirburdenofdebtsincreasesit,becauseofthemasseffectofthestampede to liquidate in swelling each dollar owed. Then we have the great para- dox which, I submit, is the chief secret of most, if not all, great de- pressions: The more the debtors pay, the more they owe. The more the economic boat tips, the more it tends to tip. It is not tending to right itself, but is capsizing."


Deflation takes time so I would mostly pile up cash, yes, and, if I were brave, rebalance every year, but holding my nose.

mizzourah2006

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Re: Let's assume the stock market craters.... Anything you can do?
« Reply #41 on: December 15, 2015, 10:33:51 AM »
Get a job and buy more.

How about with your current holdings?

You can always hedge by taking out call options on the S&P. You will need to continually purchase new call options though and it could get fairly expensive.
« Last Edit: December 15, 2015, 10:36:05 AM by mizzourah2006 »

Schaefer Light

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Re: Let's assume the stock market craters.... Anything you can do?
« Reply #42 on: December 18, 2015, 07:04:57 AM »
Get a job and buy more.
Damn straight.  With approximately another decade to go until retirement, I wouldn't mind another stock market crash.  My salary is higher than it's ever been, so I'd be buying more shares than usual even without a crash.  With a crash, I might be able to retire a couple of years sooner due to the increased number of shares I could buy.

TomTX

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Re: Let's assume the stock market craters.... Anything you can do?
« Reply #43 on: December 18, 2015, 07:55:42 AM »
Margin loan and double down.

Yeah, if the market goes down 40-50% the tentative plan is a cash-out refi to buy more stocks, presuming rates are still low.

weather55

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Re: Let's assume the stock market craters.... Anything you can do?
« Reply #44 on: December 18, 2015, 08:01:31 AM »
mizzourah2006, regarding your post of hedging with options.  If one wanted to do this how far out do you go with the expiration and when would you consider rolling into the next expiration if you wanted to continue a hedge farther out?

JetBlast

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Re: Let's assume the stock market craters.... Anything you can do?
« Reply #45 on: December 18, 2015, 09:36:33 AM »
Hoard gold and hide in your fallout shelter!

It's all about those bottlecaps, bro.

YES! Don't forget you nuka cola, blue long johns, and a 10mm pistol. ;)

Tin foil hat anyone?

I knew I was forgetting something from my bunker prep list!  Can't have those New World Order radio signals messing with my brain.

mizzourah2006

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Re: Let's assume the stock market craters.... Anything you can do?
« Reply #46 on: December 18, 2015, 11:39:36 AM »
mizzourah2006, regarding your post of hedging with options.  If one wanted to do this how far out do you go with the expiration and when would you consider rolling into the next expiration if you wanted to continue a hedge farther out?

That's a good question and it gets complex when you are looking at the strike prices you want. If I were even considering call options I'd buy them deep in the money to protect me from a huge loss. Let's use SPY as an example.

According to an options chain you can buy $180 strikes (~10% loss) that expire Jan. 29, 2016 for $0.86/share. So that would get you about 5 weeks out for $86/100 shares. So for $258 you could protect 60k of money until Jan. 29th to the point where if the market collapses the worst that happens to you is that 60k is worth 54k. They obviously get much more expensive the further out you go. If we want to go out to June 17th, 2016 the price for the $180 strikes goes up to $286/100 shares or $858 to protect those same 300 shares.

It really comes down to how much are you willing to lose before you want the hedge. I honestly think hedging with deep in the money call options is a better strategy than the stop/loss orders many people use because of days like late August when the market sold off very quickly which stopped people out of positions only to see them recover within an hour. GE dropped from ~$24/share to $17/share temporarily and then was back up to $22-23/share by the afternoon. If you had a stop loss order on GE @ $20/share you may have gotten stopped out at $18 (by the time the order got executed) only to see it be worth $22 a couple hours later.

Like many have said if you are a young FIer you have plenty of options, including going back to work, but if the stock market were to crater and you wanted insurance in case that happened calls are one option.

weather55

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Re: Let's assume the stock market craters.... Anything you can do?
« Reply #47 on: December 18, 2015, 12:01:23 PM »
mizzourah2006,  thanks for the scenario you posed.  Based on your experience if one bought the January option but decides in the month of January that they want to keep the protection longer would there be an ideal time to sell the January and buy the next dated option?   What platform have you used for your options trading.  I have wellstrade right now which isn't the cheapest but at this point I am just wrapping my head around concepts.

mizzourah2006

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Re: Let's assume the stock market craters.... Anything you can do?
« Reply #48 on: December 18, 2015, 03:53:08 PM »
mizzourah2006,  thanks for the scenario you posed.  Based on your experience if one bought the January option but decides in the month of January that they want to keep the protection longer would there be an ideal time to sell the January and buy the next dated option?   What platform have you used for your options trading.  I have wellstrade right now which isn't the cheapest but at this point I am just wrapping my head around concepts.

I honestly don't use options, just proposed it as a hedge against a market crash. You can use any platform, like etrade to buy or sell options. A lot of times your call options will expire and be worthless if you use this strategy. It would be very similar to insurance. As you get closer to the expiration date the calls are worth less and less assuming they are still far out of the money. The 180 call options that expired this week had ask/bids at 1-2 cents when I looked this morning, which would mean you could get a couple bucks if you sold your three 180 call options. You wouldn't trade them you would just continually purchase them as a form of insurance in the scenario where you are always concerned about a market crash. I'm not really sure it would actually be worth it, but it could be if we see the market cut in half and it takes 3-4 years to return to today's levels and you have just begun RE.

Mighty-Dollar

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Re: Let's assume the stock market craters.... Anything you can do?
« Reply #49 on: December 18, 2015, 06:25:35 PM »
Like to get discussion/advice about if there is anything you can/should do during a major stock market downturn to stem the bleeding a little.

Is there anything you can do? up your bond exposure? what did you do during 2008/2000/late 80's, if anything?

Curious...thanks!
How do you know an X% decline will decline more? You don't.
You're supposed to take advantage of the sale by rebalancing back to your preset allocation ratio. For example if stocks decline then you move some bond money into stocks. It's counter intuitive but over time it increases your returns.