1/5/17

*Next Monday is entirely hypothetical, assume the one following the day you read this thead.
*Reasons behind the market crash are also entirely hypothetical, if you are looking for some magnitude, let's say it's September 2007 again.

In other words, how prepared are you for the unknown?

Comments (12)

1/5/17

September 2007 wasn't a crash. Nor was September/October 2008, although it was a panic that took place over five days. Can you be more specific?

EXAMPLES:

-On Monday, Morgan Stanley winds up a subprime MBS hedge fund due to a significant increase in defaults. The VIX ticks up to 14%.
-A major bank defaults. Markets drop 7% for the first time in 31 years.
-The TARP bill fails and markets drop 7%.
-On Friday, markets drop 7%. On Monday, they drop 7% again.

Is your question more about what preparations I've made for this, or what I plan to do? IE do I hold some VXX or is my plan to get in my rusty honda, drive to the Michigan UP, and buy a ramshackle house for $40,000 to live in until the Great Depression ends in a decade or so?

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1/5/17

Alright. The question itself is open to both the options you listed:
-if and what kind of preparations you've made
-if you haven't, how would you react

As for your scenario, I understand your need for a bit more of specifics but for part of the question is also whether or not you would survive a Black Swan event, regardless of what it actually is.

So, within the limits, yes, cumulative markets drops are a realistic scenario, say 7% one day, 12% the following one, but also your working place or a major financial institution going bust, or for the sake of it, a market wise relevant number of countries deciding the US Dollar for them is no good anymore.

Best Response
1/5/17
neink:

Alright. The question itself is open to both the options you listed:-if and what kind of preparations you've made-if you haven't, how would you react

As for your scenario, I understand your need for a bit more of specifics but for part of the question is also whether or not you would survive a Black Swan event, regardless of what it actually is.

So, within the limits, yes, cumulative markets drops are a realistic scenario, say 7% one day, 12% the following one, but also your working place or a major financial institution going bust, or for the sake of it, a market wise relevant number of countries deciding the US Dollar for them is no good anymore.

With respect, if you find it hard to get responses to questions that you ask people, it's really challenging to answer a broad and unstructured question. It's the same reason why "Tell me about yourself" is sorta an unfair interview question, at least to ask a college junior who is new to interviewing. Sometimes it's easier to ask a specific question that's structured, narrow, and easy to answer, and then ask some followups if you want.

So I typically keep some cash on the sidelines in my retirement and brokerage accounts, besides having 18 months' emergency savings. I also will sometimes protect 25-30% of my portfolio with put options at 90% of spot on the SPY ETF (S&P 500 ETF) if the VIX is cheap (a measure of how expensive options are).

When the crash actually hits, I've been there, done that. I know you're scared, I know you're worried about losing your job, and I know hindsight is 20/20-- and there might not be a bottom this time around. But you back up the truck and buy. Try and find the stuff that is safe and boring but illiquid. Stuff like AAA-rated mortgage backed securities, MLPs (which mutual funds can't buy because they generate K1 tax forms), and any safe and boring company in the same industry but totally different area. Look for panic selling of boring assets. And buy 80% of what you safely can. (Leave a little money in reserve for if the market drops further-- you won't be able to call the bottom and you're leaving some money on the table, but it's the concession you make to the voice screaming in your head that the world is ending.)

If it helps, I worked for Lehman, probably the worst place to be during the 2008 crisis. None of the 120 people in my analyst "facebook" (the book of resumes they passed out) starved to death or even became homeless. And we seriously thought it was the great depression-- that's always how it feels near the bottom of a major recession. The '75 oil crash looked like the end of the world. Reagan called the '80 recession a depression. And on September 15th 2008, it looked like the Great Depression was going to come back. Every single time a bad recession hits, people panic, claim it's the end of the world, there's no bottom, but the bottom comes. Then for a while people claim it's a false bottom, we're going to go lower. And then, unless their name is Peter Schiff, they crawl back into the woodwork and are shamed enough to stay quiet until the next recession or the next crash.

On the currency issue, a good portfolio is designed to protect against a weak US currency. 75% of my equities are in the US, but 25% are international. Furthermore, I'm a bit more Malthusian than the average investor, so some of my investments are in resources and commodity-producers, as well as a few gold miners, which are all more resilient to currency and country-level issues. I also have a modest amount of physical silver and gold in case of a true beyond-design-basis scenario for the economy.

1/6/17
IlliniProgrammer:

neink:Alright. The question itself is open to both the options you listed:-if and what kind of preparations you've made-if you haven't, how would you reactAs for your scenario, I understand your need for a bit more of specifics but for part of the question is also whether or not you would survive a Black Swan event, regardless of what it actually is.So, within the limits, yes, cumulative markets drops are a realistic scenario, say 7% one day, 12% the following one, but also your working place or a major financial institution going bust, or for the sake of it, a market wise relevant number of countries deciding the US Dollar for them is no good anymore.

With respect, if you find it hard to get responses to questions that you ask people, it's really challenging to answer a broad and unstructured question. It's the same reason why "Tell me about yourself" is sorta an unfair interview question, at least to ask a college junior who is new to interviewing. Sometimes it's easier to ask a specific question that's structured, narrow, and easy to answer, and then ask some followups if you want.

So I typically keep some cash on the sidelines in my retirement and brokerage accounts, besides having 18 months' emergency savings. I also will sometimes protect 25-30% of my portfolio with put options at 90% of spot on the SPY ETF (S&P 500 ETF) if the VIX is cheap (a measure of how expensive options are).

When the crash actually hits, I've been there, done that. I know you're scared, I know you're worried about losing your job, and I know hindsight is 20/20-- and there might not be a bottom this time around. But you back up the truck and buy. Try and find the stuff that is safe and boring but illiquid. Stuff like AAA-rated mortgage backed securities, MLPs (which mutual funds can't buy because they generate K1 tax forms), and any safe and boring company in the same industry but totally different area. Look for panic selling of boring assets. And buy 80% of what you safely can. (Leave a little money in reserve for if the market drops further-- you won't be able to call the bottom and you're leaving some money on the table, but it's the concession you make to the voice screaming in your head that the world is ending.)

If it helps, I worked for Lehman, probably the worst place to be during the 2008 crisis. None of the 120 people in my analyst "facebook" (the book of resumes they passed out) starved to death or even became homeless. And we seriously thought it was the great depression-- that's always how it feels near the bottom of a major recession. The '75 oil crash looked like the end of the world. Reagan called the '80 recession a depression. And on September 15th 2008, it looked like the Great Depression was going to come back. Every single time a bad recession hits, people panic, claim it's the end of the world, there's no bottom, but the bottom comes. Then for a while people claim it's a false bottom, we're going to go lower. And then, unless their name is Peter Schiff, they crawl back into the woodwork and are shamed enough to stay quiet until the next recession or the next crash.

On the currency issue, a good portfolio is designed to protect against a weak US currency. 75% of my equities are in the US, but 25% are international. Furthermore, I'm a bit more Malthusian than the average investor, so some of my investments are in resources and commodity-producers, as well as a few gold miners, which are all more resilient to currency and country-level issues. I also have a modest amount of physical silver and gold in case of a true beyond-design-basis scenario for the economy.

Lmao, I love the Peter Schiff reference.

Another excellent post by IP.

1/6/17

Great post!

1/5/17

-Keep enough money in cash that you have a year or two of living money
-Keep enough money in a market neutral fund for a house someplace other Manhattan/LA/SF/etc
-If things get really bad, put some cash to work

1/5/17

start up, cash in, sell out, bro down

1/5/17

Like anything else, it depends on your circumstances. I'm a helicopter pilot in the army, and for the past few years i've been aggressively investing and rooting for pullbacks (although not the meltdown OP is describing) to buy at a discount. Now, I'm leaving the military in June (exactly ten more paychecks of my low six figure salary) and i'm starting business school in the fall. Right now, between cash and equities I have tuition cost plus approx $100K in the bank, and I'm most interested about in my gains to make sure a crash doesn't deplete cash i'll need over the next two years with no income. I was seriously shitting my pants on election night when DOW futures were down 800 pts. A 10-20% hit on my portfolio would hurt just prior to liquidating to pay tuition. To prevent the catastrophic effects of a crash, I took advantage of the recent run up to exit a number of my positions (about 50k). Obviously, your investment philosophy depends on timeline for which you'll need access to the capital.

Professionally, idk what i would do if the market crashed 8 months before starting my MBA. I guess I would continue as planned and hope it recovers by 2019. As I'm considering IB, I've thought about how rx is probably safer than M&A since there is some upside in a down economy. After trump got elected, i started considering it more seriously as a possible recession firewall. In general, my view now is much different than it would have been five years ago. If the market crashed in 2011, I would've sunk everything I had into it and kept flying helicopters and killing bad guys.

1/6/17

Is it possible for non-military folks to buy an army helicopter for entertainment purposes? If so, price (assume we're talking mid-level range, not top spec)?

1/6/17

yeah you can totally buy old military helicopters, obviously not the the top-of-the-line equipment and it's not going to come with any of the military systems on board, but if you've got the cash you can buy them.

You can also pick up old Russian helicopters, jets, and tanks.

1/7/17

@IlliniProgrammer I get your criticism, but at the same time, if I give you or anyone else the nature of the crash beforehand, then it kills the purpose of the question and I risk ending up with answers like ''well short the company/sector that is going to shit duh''.

For the sake of it, I really can't go much further than defining the crash as a generalized and significant drop of the stock market for a number of consecutive days, without you understanding the cause for the time being.
I'm definitely satisfied with your answer and I thank you for that.

@Gray Fox
What if the crash affects the value of the currency? Since Illini brought Schiff to the table, let's say Schiff prophecy turns right and the US Dollar goes into hyperinflation?

@aeroscout

So, how would you define the lesson learned during the election night? Diversify?
Man this really sounds like an interview question.

1/7/17
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