Im just curious how ppl prepare their portfolio's when a crash is inevitable. Here is a small example of sectors during the 2011 crash,... which pales in the face of the 01-02 and the 07-08 crashes. Here’s how the 10 S&P 500 sectors performed during that 2011 period, from best to worst: S&P 500 sector Decline from July 22 through Oct. 3, 2011 Utilties -2.9% Consumer Staples -7.5% Telecommunications Services -8.5% Health Care -13.5% Information Technology -14.4% Industrials -17.3% Consumer Discretionary -17.5% Financials -26.4% Energy -27.4% Materials -28.0% Source: FactSet
Well myself, I do NOT see a "crash" as inevitable. In my opinion people that sit around thinking in terms of CRASHES are doomed in their investing. ( in general, not talking about the OP, he raises a good issue and question for discussion) I DO see a recession as inevitable since they occur as part of the NORMAL business cycle, just as corrections also do. The two periods you use as part of your examples....2002 and 2008....are extreme outliers and do NOT represent NORMAL market action. 2002 was the end and last gasp of the dot com insanity. 2008, was perhaps the most extreme period......IN HISTORY...... other that the great depression. I DONT try to time the markets and do not try to prepare for extreme events like the great depression or the collapse of 2008. Now as to the time period you cite in 2011....that is a NORMAL little correction/recession that ONLY lasted 3 months. Why would I do anything to prepare or take action for a normal, 3 month market event? As to the EXTREME like 2008. Those that did nothing enjoyed the next TEN YEARS of historic market returns and are doing just fine. So, being a LONG TERM INVESTOR, I generally dont do anything to try to prepare for some unknown, unpredictable correction or recession. I believe that trying to predict and prepare for such events simply KILLS your returns since most of the time you will be WRONG in your thinking or prediction and will be preparing for an event that will actually NOT happen. SO......I simply hold through any correction or recession. i reinvest during those periods as usual. I stay 100% in stocks and funds as usual. AND....over the long term or actually over just 5 or more year historically, I do just fine and BEAT those that try to predict and react to market events that are UNPREDICTABLE. As to 2011.....the SP500 for that year ended UP +1.97%.....so no big deal. As for 2002.....SP500 lost -22.6%......but over the next five years gained +65.07%. As for the ABSOLUTE WORST time........2008.....the SP500 lost -37.02% in 2008. BUT over the next 10 years including this year is......UP +160%. AND these figures do NOT take into account the compounding of gains year after year. Starting in 2002 the SP50 has been positive 15 out of 18 years. I WILL take those odds any time. Even those SCARY (not to me) years.....2002 was down -22.06%, BUT the next year 2003 was UP +28.5%.......2008 was down -37.02%, BUT the next year was UP +26.49%. The ONLY way I would say someone should prepare as an investor is to make sure you are accurate and honest in your self evaluation of your RISK TOLERANCE and what you are invested in so you will not get SCARED out of the markets at the wrong time and lock in losses and end up siting and missing out on gains because you dont know how or when to get back into the markets. BUT....the SAD thing is......the vast majority of people will fail miserably with their market timing, and jumping in and out based on fear and panic and accordingly.......as the academic research shows.....will severely under-perform the un-managed averages. Of course, the vast majority of the so called professionals can not beat those averages either.
I will agree that predicting a crash/correction/recession or whatever you care to term it as,.. can be nearly impossible. But I do believe as a 'trader' having a stop limit on your portfolio, weather it be in its entirety or in partial, can minimize losses to some degree,.. and therefore minimizing recovery as well. The added bonus to that strategy is to buy back in on a recovering market at much lower prices for even greater gains. Everyone has their own strategies im sure ,..to invest in a fund and just hold it life long isn't really the objective of a trader is it?,... any Joe can do that,.. a trader that's looking to optimize his income would likely use the ups and downs of the market toward his/her advantage.
I AGREE, Shaw. If you are a trader, as a trader what you do and how you do it are very different than what I do as a long term investor.
I feel WXYZ and I have covered crash mitigation pretty well, from an investor point of view. Shaw, why don't you help us understand how a trader deals with this corner case?
