Crash math

[marko]

“Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves.” – Peter Lynch

My neighbor (smartest girl in the room...just ask her) proudly announced that she had sold everything on Friday the third week of February 2009. The next Monday.....

[nun]

Quote:

Originally Posted by Boho Has anyone actually calculated if or when you should turn everything to cash based on some informal probabilities? I read predictions that a correction would come in March, by the end of the year, and even next year. So, if you figure on the worst case scenario (being in cash for the longest time) and assume it's next year and you wait another month to liquidate and stay liquid for a year, then reinvest at some low point of your choosing, would you likely lose money? The assumption is that there will be a correction in that year's time. Your mission is to guess how low it will be when you reinvest and whether you'll likely save or lose money by doing this.

Let asset allocation be your guide.......eventually you will learn that the questions you are asking are the wrong ones and you will be successful enough so that you don't to have to worry about market crashes.

My advice is to stop reading predictions.

[RISP]

Quote:

Originally Posted by FiveDriver The Trick is to build up gains such that a 10% give-back doesn't kill you.

Why would it make a difference if you loose 'gains', or part of your original investment? It's still money, either way. That sounds a lot like the old folly of the gambler who thinks he's playing 'with the casino's money' after an initial lucky bet.

[COcheesehead]

There's an underlying 800lb gorilla in this thread and that is how we let our emotions get the upper hand in a downturn. People talk about strategies for when a correction or bear market hits, the trigger point for selling or when its ok to absorb a hit, when they have 10% plus gains. It is all just mechanisms to try and control the uncontrollable and let our emotions drive our decisions.
What we all need to do is imagine our portfolio 10%, 20%, 30%...lower and figure out how we would deal with that emotionally. I personally would be buying, not selling and trying to rebalance to my original AA. That is the lesson I have learned over my 54 years on the planet.

[W2R]

Quote:

Originally Posted by Boho Has anyone actually calculated if or when you should turn everything to cash based on some informal probabilities?

Yes - - after reading several books on investing from this booklist, I think most investors will conclude that "turning everything to cash" is a pretty stupid thing to do in a crash. A crash is a blue light special, a great buying opportunity when funds are on sale.

We saw this in 2008-2009. Those of us who bought low, came out of that crash better off than we were before, for the most part.

I think that new investors who are still asking questions like this, should carefully read at least half a dozen books from the Bogleheads booklist that I linked to above and they should think about what they read, and re-read that material several times. Questions thoughtfully asked by someone well educated in investing (for example by reading and studying such books) will be framed in such a way that they will not seem like they are trolling the board at all. So, there are several advantages we can attain by pursuing this type of self education.

[easysurfer]

Quote:

Originally Posted by Boho Has anyone actually calculated if or when you should turn everything to cash based on some informal probabilities? I read predictions that a correction would come in March, by the end of the year, and even next year. So, if you figure on the worst case scenario (being in cash for the longest time) and assume it's next year and you wait another month to liquidate and stay liquid for a year, then reinvest at some low point of your choosing, would you likely lose money? The assumption is that there will be a correction in that year's time. Your mission is to guess how low it will be when you reinvest and whether you'll likely save or lose money by doing this.

(Bold added by me for emphasis). Too many assumptions which adds to variables and uncertainty. Plus, doesn't mention the expense involved in moving in and out of cash.

I haven't given up on you Boho. A year or two from now, you may be praising how rational the approach of just sticking to asset allocations and rebalancing is compared to trying to swing for the fences and whiffing.

[Boho]

Quote:

Originally Posted by W2R Yes - - after reading several books on investing from this booklist, I think most investors will conclude that "turning everything to cash" is a pretty stupid thing to do in a crash. A crash is a blue light special, a great buying opportunity when funds are on sale.

I know...I just posted about how I bought Urban Outfitters stock after bad news brought it way down. I didn't ask about selling near the bottom. Worst I asked is about "some low point of your choosing." Then it could get lower and you can buy back. It obviously has to get somewhat lower than normal before you have an indication that it will be dropping more. (actually this thread is about selling when high, but selling when there's a quick drop in progress could work too)