What actions to take in a stock market crash?

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livesoft
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Re: What actions to take in a stock market crash?

Post by livesoft » Mon Aug 04, 2014 8:46 pm

I think the OP will be surprised by the correct number because it is quite a bit different from the first guess. Also I think doing real math as opposed to fake math is a good way to reign in emotions.
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Silverado
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Re: What actions to take in a stock market crash?

Post by Silverado » Mon Aug 04, 2014 8:52 pm

Yeah I suppose. Certainly will make it less of an impact on some levels....until he does it again with another 50% drop. Shudder shudder.

sscritic
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Re: What actions to take in a stock market crash?

Post by sscritic » Mon Aug 04, 2014 8:53 pm

And when he actually rebalances, he will have to do real math. Getting it wrong in a practice run here today has fewer consequences than when he does it for real during a crash. Now is the time to learn to do real math, not during a crash when your emotions are trying to get the better of you. I know I don't do math well when I am crying.

LongerPrimer
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Re: What actions to take in a stock market crash?

Post by LongerPrimer » Mon Aug 04, 2014 9:04 pm

Around August 2008 I started to reexamine our portfolio (60/40), fully invested, 401k max, plus the 401k and IRA-ROTH over 50 kicker. By September I was learning about annuities. By October, I had pretty much made the decision to go buy deferred variable annuities with so-called living income benefits. Fortunately or unfortunately we were able to close on these annuities in late Nov and early Dec 2008. However the damage was done. From what I have read, Everyone lost something close to 40%, regardless of AA, and only those who were able to AA (we overall did 80/0/20, and within the annuities we did 100/0/0 )and who had jobs were able to exit the Great Recession sooner . We lost our remaining income in 2010.

Today, ~65% of our portfolio is protected from down markets longer than 1 year. Be aware that annuities is risk transference.
GL

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Re: What actions to take in a stock market crash?

Post by dognose » Mon Aug 04, 2014 9:34 pm

LongerPrimer,

I'm confused about your comment that "Everyone lost close to 40 percent, regardless of AA . . ."

My 50/50 portfolio was down 17 percent at the end of 2008. Not great, obviously, but a far cry from down 40 percent (and very close to the comparable Vanguard Tax-managed Balanced fund, which was down about 18 percent). I bit the bullet and rebalanced in January 2009 and everything worked out fine. In other words, restoring my AA to 50/50 was very effective. I will admit, though, that I had to take a very deep breath to rebalance from bonds to stocks in the very dark days of early 2009.

If I mis-understood your earlier statement, I apologize. I'm just trying to underscore that the rebalancing strategy can do the trick. And if it worked in 2008/2009, it must really work.

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EyeYield
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Re: What actions to take in a stock market crash?

Post by EyeYield » Mon Aug 04, 2014 9:36 pm

1987, 2000 and 2008, I was working and reinvesting dividends, so I did nothing but add to my DRIPs and some to my IRA.
Now retired, my AA is 60/20/20. 20% in cash is a drag on my total return, but I consider it crash insurance. 10% for 4 years of living expenses and 10% for rebalancing as necessary. So those are the actions I've taken for the next crash.
My 60-20 stock/bond allocation provides enough income to pay my annual expenses for now and I hope a few more years of rebalancing will improve on that.
I TLH and/or rebalance every December, so if the market crashes tomorrow, l'll do nothing until December anyway.
By that time everything might change again. Tomorrow's crash may have nothing in common with crashes of the past. A future crash may happen in a few hours, like,'87 or over a period months or years. It may be the result of a nuclear event or some other black swan event and last for decades.
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Re: What actions to take in a stock market crash?

Post by JonnyDVM » Mon Aug 04, 2014 9:43 pm

I'm going to buy buy buy and be giddy about it. :moneybag
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Muso
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Re: What actions to take in a stock market crash?

Post by Muso » Mon Aug 04, 2014 10:00 pm

John3754 wrote:
nobsinvestor wrote:
livesoft wrote:
nobsinvestor wrote:Are you supposed to use $250,000 of those bonds to buy $250,000 of stocks?

Is that the "right" move?
No. That is bad math. I'll let you re-do the math and report back.
I guess it wouldn't be $250,000 since the value of the bonds would be higher, right? But it would still be a substantial part of your bond allocation.
Your arithmetic still needs help, try again...If you start with a 50/50 allocation of $500k in stocks and and $500k in bonds and your stocks drop to $250k (assume your bonds are still worth $500k), how much do you have to move from bonds to stocks to get back to a 50/50 allocation? Hint: The answer is NOT $250k.

$125k

Muso 8-)

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Re: What actions to take in a stock market crash?

Post by LongerPrimer » Mon Aug 04, 2014 10:36 pm

Some lost 40% in balanced position portfolio or MF.
In our situation we were in balanced MFs and not in sectored funds. Re-AA meant I had to sell MF and reallocated in MF within the annuity.

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Re: What actions to take in a stock market crash?

Post by HenryPorter » Mon Aug 04, 2014 10:41 pm

nobsinvestor wrote: But the question is, how do you catch the falling knife? What if the original 40% crash happens in one month, and then it falls another 25% the next month?

Would just not touching your portfolio at all until the market recovers (even if that takes years) be an option?(assuming you have 6 months-1 year of risk-free money in CDs/Bank and bonds)

Funny how these topics don't seem to get discussed much in a rising market!

Thanks!

Ever since I enrolled in TD Ameritrade's no-fee ETF plan, I have set up a buy list of ETFs I would want to get in a market sell-off. I simply set a limit order and amount of shares I wanted and those buy orders are good for the next 4 months. So, come November, if the market has not sold off enough to trigger any of my buy orders, I'll just renew the buy orders for another 4 month period. I can reset the orders at any given time too.

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Re: What actions to take in a stock market crash?

Post by oragne lovre » Mon Aug 04, 2014 11:34 pm

nobsinvestor wrote:Ok, so sell bonds and buy stocks.

But what if the knife keeps falling?

Like I said- let's say you sold bonds and bought stocks after a 30% stock crash.

Then 1 month later, or some time later, it falls another 30%.

How do you decide when to "pull the trigger" on that falling knife??
The more falling the knife, the more equity portion you should get. Since you don't know when the bottom arrives, you should keep buying until you get there.

http://www.bogleheads.org/forum/viewtop ... 10&t=33201

In addition, be sure you do arithmetic right, especially when you're emotional.
The finest, albeit the most difficult, of all human achievements is being reasonable.

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Re: What actions to take in a stock market crash?

Post by pkcrafter » Mon Aug 04, 2014 11:42 pm

Yep, you are supposed to hold, which can be verrrrry hard to do. Some investors, even on this board, who vow to hold, will sell in the next crash. So, there you are wondering what's going to happen to the remainder of your assets and someone tells you to buy more stock. :shock: I've done it, but I didn't jump for joy at the idea of buying stocks cheap.

Hint at the rebalancing problem. You lose 250k, so the portfolio is now worth 750k. 50% of that is 375K, so you "only" need to transfer 125k from bond to stocks. If all that sounds too extreme, then consider lowering equity allocation.

Paul


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Re: What actions to take in a stock market crash?

Post by Regal 56 » Tue Aug 05, 2014 7:59 am

Although it’s considered bad form around here, I’m partial to running in circles and screaming. After doing it to exhaustion, I then keep making my annual contributions and rebalancing.

In 2008, my portfolio fell some 47%. By late 2009, I was back to even. So obviously my approach works. Some would say that staying the course is what did it. But for me, running in circles and screaming was the necessary catharsis that enabled me to stay the course.

There are many roads to Dublin—some involve screaming like a banshee.

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Re: What actions to take in a stock market crash?

Post by EyeDee » Tue Aug 05, 2014 9:13 am

.
As a couple of posters have posted the number we believe Livesoft wanted you to give is $125K. However, I would like to suggest the right number might be $100,000.

As some have pointed out in a downturn some people have a Plan B. For some people Plan B is to sell what is left in stocks when they get too low, which others think would be a mistake. Some have a Plan B of working longer or going back to work.

Another Plan B that might be of use to you would be to stop rebalancing once your cash/bond balance has gotten too low. For example if you are taking $40,000 a year from your million dollar portfolio, you might want to say you will stop rebalancing if you get down to 10 years in cash and bonds, which would make $100,000 the right answer to how much to move to stocks in a major down turn.

You would miss some of the opportunity of investing at the lows, especially if the market continued down for a couple of years, but you would have gotten $100,000 invested at a 50% down turn and when things returned to normal you would have enjoyed a nice return on your stocks.

Also of note, if your $40,000 a year included some luxuries such as expensive travel, you might want to also cut that down some during the worst of the down turn to keep expenses to a minimum.
Randy

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Re: What actions to take in a stock market crash?

Post by magneto » Tue Aug 05, 2014 10:30 am

Hi OP. Good question. One that bothered us equally.

For some years now have settled on what might be called 'Equal Percentage' (of deviation) Rebalancing.

With a shift in market levels, we rebalance quarterly a set percentage of the deviation from the target, in our case 10% of deviation. This means the investors always moving in the right direction in response to market moves, but seldom reaching the target, unless the market comes to meet them.
There are some behavioral and system stability advantages to this method.

As others have observed, the investor needs to set a reasonable stock AA target at the outset, well within the risk tolerance of the investor. Severe/prolonged bear markets are not the time to discover a loss of appetite for risk.
Last edited by magneto on Tue Aug 05, 2014 12:43 pm, edited 1 time in total.
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Aptenodytes
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Re: What actions to take in a stock market crash?

Post by Aptenodytes » Tue Aug 05, 2014 10:53 am

Dan Ariely tells the story of what he did during the 2008 decline. He deliberately entered the wrong password in his online account enough times to trigger a lock-down that would take a minimum of something like three days to rectify.

If you are faint of heart you should be imagining what kinds of things like this would help you avoid mistakes you'll regret later on.

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Re: What actions to take in a stock market crash?

Post by Tanelorn » Tue Aug 05, 2014 11:35 am

Look for bargains.

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Re: What actions to take in a stock market crash?

Post by pkcrafter » Tue Aug 05, 2014 1:44 pm

Regal 56 wrote:Although it’s considered bad form around here, I’m partial to running in circles and screaming. After doing it to exhaustion, I then keep making my annual contributions and rebalancing.

In 2008, my portfolio fell some 47%. By late 2009, I was back to even. So obviously my approach works. Some would say that staying the course is what did it. But for me, running in circles and screaming was the necessary catharsis that enabled me to stay the course.

There are many roads to Dublin—some involve screaming like a banshee.
I like it. That's a way of framing the problem while not using techniques to minimize the thought of loss. Instead, you make if face to face and sneer at it. Well, after screaming like a banshee. :sharebeer

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Sbashore
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Re: What actions to take in a stock market crash?

Post by Sbashore » Tue Aug 05, 2014 1:47 pm

galeno wrote:It helps when you've been thru 3 nasty bear markets like I have: 1987, 2000, and 2008. Risk tolerance, like whiskey, is an acquired taste.
+1 :beer
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Re: What actions to take in a stock market crash?

Post by MathWizard » Tue Aug 05, 2014 1:59 pm

placeholder wrote:Right many of us did just that because we didn't have any way to tell when things had "quit falling" so I rebalanced and did TLH in fall of 2008 and did it again in summer of 2009.
Same here.

You've really got to "lash the steering wheel" and not change your investment plan during a market downturn.
If you do, you will easily over-react.

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Re: What actions to take in a stock market crash?

Post by Trader Joe » Tue Aug 05, 2014 2:52 pm

My plan in a crash is to move to 100% stock. Easy money.

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FelixTheCat
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Re: What actions to take in a stock market crash?

Post by FelixTheCat » Tue Aug 05, 2014 2:53 pm

When the market crashes again, I simply plan on buying the less expensive stock mutual funds with new money.
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Re: What actions to take in a stock market crash?

Post by John3754 » Tue Aug 05, 2014 2:54 pm

Trader Joe wrote:My plan in a crash is to move to 100% stock. Easy money.
And at what point do you move to a 100% stock? How much does the market have to drop before you "pull the trigger".

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Re: What actions to take in a stock market crash?

Post by supertreat » Tue Aug 05, 2014 3:36 pm

My plan is to match each X% decline with a X% increase in equity allocation and then if/when I"m 100% equities I'll put all future contributions to bonds until portfolio is back in line to desired mix.
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Re: What actions to take in a stock market crash?

Post by oldzey » Tue Aug 05, 2014 3:39 pm

Tax harvest, look for bargains, reevaluate the amount of risk (pain) you are willing to bear, rebalance portfolio, tighten belt, and stay the course.
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Re: What actions to take in a stock market crash?

Post by Garco » Wed Aug 06, 2014 10:36 am

Sbashore wrote:
galeno wrote:It helps when you've been thru 3 nasty bear markets like I have: 1987, 2000, and 2008. Risk tolerance, like whiskey, is an acquired taste.
+1 :beer
Hmmm. I learned to like whiskey long before I was in the stock market. But I agree that living through major bear markets (recessions) is a learning experience. That said, none of these events were truly the same, and I don't think there's a one-size-fits-all response, in part because your stage in career (accumulating, in retirement?) matters to your risk tolerance, and your specific configuration of assets does too. In 1987 I was still in early-mid career, and I knew that whatever happened in the market would be overcome by my own human capital production over the next 25 years. Besides, I was too busy to mess with the market. So I did nothing in response. In 2000, I had goofed up and been taken in by the dot-com hype in the late 1990's; after the crash, I kept my stock percentage but abandoned these hyper projects for more conventional stock funds. While it took the NASDAQ about 13 years go get back to where it was in March 2000, my equities holdings recovered a lot faster than that but I probably erred by not rebalancing more into stocks. However, I didn't repeat the chase for the next great fortune. In the 2008 crash, I handled this well enough, in my opinion, and I went from bottom in March 2008 back to my previous savings quickly enough by rebalancing. Again it didn't hurt that I was still employed and contributing from salary every month.

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Re: What actions to take in a stock market crash?

Post by tram » Wed Aug 06, 2014 7:53 pm

DaveG wrote:In simple terms, you'd sell bonds and buy stocks to rebalance to your desired asset allocation.
+alot

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HomerJ
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Re: What actions to take in a stock market crash?

Post by HomerJ » Thu Aug 07, 2014 4:10 pm

nobsinvestor wrote:Thanks for all the replies so far.

Let's go with this specific scenario that I was thinking about:

You're 60 years old and retired with exactly $1 million in a 50/50 stock/bond split one day.

The next day stocks fall 50% in the biggest sell-off in modern times. Your bonds are worth a bit over $500,000 now, and your stocks worth $250,000.

Are you supposed to use $250,000 of those bonds to buy $250,000 of stocks?

Is that the "right" move?

How are you supposed to live off of your now $250,000 in bonds, especially in today's low interest rates? Obviously you couldn't from the yield alone, so you'd be selling some of those bonds every year.

Now let's say stocks fell another 15% after the 50% initial crash.

I guess the dilemma is, what if stocks take 10-15 years to recover to the level that you bought at when the market crashed?

Am I overthinking this?

Is the simple answer just this?: Rebalance, Rebalance, and if it means you can't stay retired or messes up your other plans, there's nothing you can really do?

I would not rebalance as a retired investor, or even close to retiring... I would just stay the course and do nothing...

Doing nothing is a fine option at any age actually... Not selling in a panic is the first huge step... Being able to rebalance on the way down isn't necessary to be successful... Not selling in a panic is much more important.

During the last crash, I rebalanced once when the DOW went below 10,000 (from 14,000)... I didn't have the guts to rebalance again as it sunk even lower (into the 6000s), because I thought a world-wide economic collapse was possible (i.e. Great Depression II). I had 300k in bonds, and a 200k mortgage, and I wanted to keep that cushion intact... just in case...

BUT... I never thought about selling stocks... my wife did, and I had to convince her to stay the course... I also had zero problem putting new money 100% into stocks... That was how I "rebalanced" (slightly)... We changed our 401k and IRA contributions from 50/50 to 100% stocks... That was easy... Selling my existing bonds to buy more stocks was too much for me... but putting all new money into stocks was easy... I felt like I was buying them cheap. Very strange dichotomy I know.

Just my experience... I doubt I'll ever rebalance into a stock market crash again... Now I just rebalance on the upside... My AA is all about controlling risk, not maximizing returns.

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Re: What actions to take in a stock market crash?

Post by nobsinvestor » Thu Aug 07, 2014 4:57 pm

Thanks for all the replies guys, very informative.

Sorry that my math wasn't correct earlier...I was half asleep when I posted. Yes, I realize that 125k is the right answer to my original statement about rebalancing from bonds into stocks in a 50/50 $1 million portfolio.

Going on what Homer recently said above, doesn't anyone agree that for a retired investor, rebalancing during a major market crash (say 40%+) might not be the "right" move and that instead they should just stay the course and not buy/sell anything? (this assumes this person already has enough in bonds to last a decade or more based on their needs)

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Re: What actions to take in a stock market crash?

Post by livesoft » Thu Aug 07, 2014 5:01 pm

I disagree with the sentiments of HomerJ.
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Re: What actions to take in a stock market crash?

Post by HomerJ » Thu Aug 07, 2014 5:20 pm

For me, once I'm retired, it's more important to minimize risk than maximize returns...

What does rebalancing into a stock market downturn get you? Answer: Almost certainly better returns in the long run.

But note the "almost".

If I'm retired, it's because I have enough... I will probably even have a cushion in there... Even if the odds are 99-1 that rebalancing won't hurt me, and will only make me richer, I still won't play that game. Because I don't need the extra money, and there's still a chance I could retire into the Great Depression II, and watch the stock market drop 89% and take 10 years to recover. And if I rebalance into THAT, then I could be seriously hurt...

But that's just me... I wouldn't call it the "right" move... It's the right move for me.

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Re: What actions to take in a stock market crash?

Post by Sbashore » Thu Aug 07, 2014 6:53 pm

livesoft wrote:I disagree with the sentiments of HomerJ.
Me too. I'm retired and rebalanced in 2008. Glad I did. Will do it again.
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Re: What actions to take in a stock market crash?

Post by john94549 » Thu Aug 07, 2014 8:21 pm

The trick to re-balancing in protracted bear markets is to be patient. Presumably, you have oodles in cash and bonds from re-balancing as stocks went up. OK, you don't have to spend it all in one gulp. Throw a tad at Mr. Market when he's at minus 10%, more when he's at minus 20%. And so on. Oodles in cash and bonds, that's the key, of course.

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Re: What actions to take in a stock market crash?

Post by sschullo » Thu Aug 07, 2014 8:53 pm

longinvest wrote:
richard wrote:
4ransom wrote:has everyone forgotten the famous PLAN B?
I was wondering the same thing. The answer seems to be "yes".
If I understood correctly the purpose of Plan B, it is not for Bogleheads (that did their homework); it's for people that got their asset allocation wrong: http://www.bogleheads.org/forum/viewtop ... 6#p2120543
and they might have thought that asset allocation would protect them as it did during the 2000-2002 bear market, when at that time, only the tech techs took a beating. In 2008, EVERYTHING went south, not matter how you were allocated. So they might have had their asset allocation right, or they took on too much risk in their allocation or they were not prepared mentally. I was lucky that I learned all of that during the 2000-2002 market. By 2008, I was prepared with an proper asset allocation for my age, took on the right amount of risk with a broad diversification with a stock/bond split and I was prepared mentally. Losing 11.8% during 2008 was nothing compared to losing 70% in 2000-02.
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Re: What actions to take in a stock market crash?

Post by oragne lovre » Thu Aug 07, 2014 9:20 pm

oldzey wrote:Tax harvest, look for bargains, reevaluate the amount of risk (pain) you are willing to bear, rebalance portfolio, tighten belt, and stay the course.
Well said! End of discussion :beer
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Re: What actions to take in a stock market crash?

Post by skylar » Fri Aug 08, 2014 7:20 am

1. Rebalance

2. Up your contribution rate as high as you can

If you have little invested, a stock market crash is a blessing to be taken advantage of. I'm glad I did.

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