How a long term investor might handle a major correction

Discussion in 'Investing' started by gtrudeau88, Mar 13, 2021.

  1. gtrudeau88

    gtrudeau88 Well-Known Member

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    I was thinking about this tonight while taking a longer than usual hot shower. I was wondering how I would handle a major correction in the market, i.e. protecting and growing my capital. I hadn't given it much thought which is bad because if I hadn't given it thought, I might be tempted to do something stupid once a correction starts.

    Assumptions:

    - No idea how long a correction may last
    - No idea how deep a correction may get but let's say the drop ultimately is at least 20%. The actual value really doesn't matter.
    - Symptoms I'm looking for to indicate a correction are most/all positions dropping at least 10% somewhat simultaneously over several days.
    - I consider the tactic of hold, buy on the cheap, and wait for the recovery to be a very sound tactic
    - Stocks will recover their peak eventually but who knows when that is

    To keep the math simple, picture 3 positions, companies X,Y,Z each valued at 10K ($100 share price each) and maybe consider company Z to be the least strong in terms of fundamentals. Say I have made a rule to sell my weakest position (Z) should the price drop 10%. The price does drop the 10% and I sell it but I keep positions X and Y even if they hit that 10% level,

    Now say I have another rule to split my cash from selling Z evenly between shares of X and Y once they reach say 20% (some %!) below the peak value. They do hit 20% below peak so I buy 56 shares of each ($4480 going to each position). I now have 156 shares of both X and Y. When the share price does eventually reach $100 again, each position is worth $15600 giving me a portfolio of $31200, which is greater than the 30K I started with.

    The only way this idea loses money that I can see is if the correction exceeds 10% but never reaches 20% or whatever % triggers the buy rule in which case I'm out 1K from the sale of Z.

    In real life I envision positions being sold representing 1/3 of the portfolio.

    What do you all think?
     
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  2. Dave Kraayeveld

    Dave Kraayeveld Active Member

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    I like the word assumption. Somewhere around the second week of March 2009 all three indexes bottomed out. At the time I was 53 years old. My recollection is that at least 33% of my friends made a run on their 401k's and put most of their funds in a mattress fund. Henny Penny was roaming the streets of Wall Street shouting "THE SKY IS FALLING, THE SKY IS FALLING". The Dow dropped to under 6,600. Back in Oct of 2,007 the Dow had peaked at over 14,100. Those who stayed the course were rewarded with a record run of 12 years. For some March 23 of last year was the greatest day in the history of the stock market. So you are considering an "option" which if done will give you an an answer. We all have had successes and failures. Remember there are many beliefs as to what a correction is. Instead of giving you my opinion which is just that an opinion. Hoping for you to see what your investment philosophy is. At least your at the plate and in the game.
     
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  3. StockJock-e

    StockJock-e Brew Master
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    Dont forget there are plenty of inverse ETFs you can buy that can be used to hedge your long positions.

    There are even 3x bear ETFs. Those are terrible to hold if the markets are going up or sideways, but if a prolonged downtrend comes along, buying some bear ETFs will comfortably hedge your longs.
     
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  4. Rustic1

    Rustic1 Well-Known Member

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    Before employing those, the more unexperienced should read the PROSPECTUS and fully understand how they work.

    Some of us but not all can outrun the S&P on a near daily basis by using SPXL "bull" and SPXS "bear" those are x3 leveraged. Just depends on how a person decides to employ the many tools in the box.

    Some longtermers hedge their positions with OPTIONS, a very popular but complex strategy.

    Some just simply hold through the storm and employ the HOPIUM method.

    Depends on the individual and how they wish to proceed.

    Regardless, it always pays to have some cash on standby for whatever situation ensues.
     
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  5. Syynik

    Syynik Well-Known Member

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    As a fulltime worker, I must add that there is a certain beauty to unplugging from the news and just ignoring what's going on.

    I read an article years ago that asked gtrudeau88's question. The following chart pointed out how there were days, seemingly out of nowhere, where the market shot up.

    If you're working and can't keep an eagle eye on things, don't sweat it. Leave your positions alone, provided you haven't bought willy-nilly without any sort of DD.

    Now, on to the pile of cash you've put away just for the correction......:cool:
     
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  6. spindr0

    spindr0 Active Member

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    How you handle a correction depends on a lot of things.

    A younger investor working full time is apt to be in the buy and hold accumulation phase with modest, if any experience with risk management. That's reality, not a criticism. HOPIUM method? Love that label, LOLOL

    Down the road a bit, as one accumulates more, some start to think of risk management. The problem here is that it requires a greater depth of financial market knowledge and a willingness to go against the traditional theme of buy and hold in order to preserve assets.

    And even further down the road, one starts to think that although additional growth and income is desired, preservation of capital becomes more important.

    For some, buy and hold is all that they comprehend and riding the market down 50+ pct (see 2000 and 2008) is the pain that they endure while waiting for the recovery. If you lose 50% then you need a 100% recovery to break even. That doesn't sit well with me. How about you? If it's OK, no need to have a plan for a correction. If not then you need to evolve one. Here's a synopsis of what I have learned.

    1987 taught me that the market can take a lot of money away from your rather quickly and you need a risk management plan.

    2000 taught me that one can indeed get out of the way of a 50% drop in the market.

    2008 taught me that not only can you get out of the way of a 50% drop in the market but you can also make a wad of money as the market craters.

    How to do it? There's the rub. It takes many years of market learning, knowledge and experience to understand how to hedge effectively. For me, that has included options, pairs trading and shorting, none of which should employed by noobs.

    Most people think that when you're defending a portfolio, you magically sell everything one day near the top and magically buy back at the bottom. Nice fantasy but if you achieve that, it's just dumb luck. To me, when you recognize the headwinds, you transition to short. The worse it gets, the more you short and/or reduce long positions.

    Options remove the need for timing since the timing is built in. Last March's correction was too fast to transition from long to short (compared to 2008) but my hedging kept my "I'm retired" portfolio's losses to about 7% when the market tanked 35%. 7% isn't hard to recover from. 35% is HOPIUM :->)

    Leveraged ETFs are complex instruments and while they can effective, they too belong in the experienced trader column.

    There is no one size fits all answer other than to learn about risk management and learn about yourself. Figure out what you're capable of as well as what you are comfortable with. Me? I'm an older coot and keeping it is more important than making it though I still strive to make it. I know me. Figure out who you are.
     
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  7. Rustic1

    Rustic1 Well-Known Member

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    ^^^^^^^^
    A LOT can be learned from this poster, glad he joined. Consider me a student of your knowledge.
     
  8. Dave Kraayeveld

    Dave Kraayeveld Active Member

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  9. Dave Kraayeveld

    Dave Kraayeveld Active Member

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    Food for thought my friend. 20 investors can have 20 different numbers in defining the word "correction". Does Buy and Hold work? Let's take the highly respected William O. the creator of I.B.D. He has offered the double coffee cup handle and the infamous CANSLIM. I read his book "How to make money in the stock market". Love the book. Now if you go to his first purchase he talks about and if he never had sold it what would that position be worth. My first foray into buy and hold was June 3 1986. Every week till March 31, 2013 i bought a position and held it. Personal experience for me which is an anecdotal story proves that money can grow wings and fly away like an eagle. Yet my buy and hold weekly purchases turned into a self created steady stream of income. Forget about the steady stream old age has created for me at 2 a.m. For me, in the bigger picture, asset allocation blows risk tolerance out of the water. The second best day in terms of investing for me was March 23, 2020. Thanks for the chance to comment. May your principles bring you comfort.
     
  10. Rustic1

    Rustic1 Well-Known Member

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    You can actually quote a post, insert it and reply below, instead of quoting with no response and adding a post below. Internet is sometimes tricky, glad Al Gore invented it. :D

    Different people have different styles, some choose to blow GABRIEL'S TRUMPET and praise to the world theirs is the only way. I have a style that works for me and refuse the HOPIUM method, others ride the storm. I always keep cash on hand.
    I hold BTC. For now I just trade.
     
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  11. spindr0

    spindr0 Active Member

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    Whatever floats your boat my friend.

    And FWIW, you can imbed your comments and the post that you are replying to in one message rather than two.
     
  12. spindr0

    spindr0 Active Member

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    Rumor has it that after Al Gore invented the internet, he and Tipper put on some disco tunes and started to grind out some moves on the dance floor after knocking down a bottle of Chianti. Al sure could move and tipper dubbed him The King of Algorithm!

    GDR! (Grinning, ducking and running) due to my abuse of the internet today!
     
  13. Rustic1

    Rustic1 Well-Known Member

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    Some of these experts are oblivious of how to hedge with options to endure any markets, while maintaining their positions.

    I'm just glad we have that guy running that big house that has that guy that runs the other place we call the Pentagon.

    My bitcoin is crashing, gotta go watch my fools gold. :rofl:
     
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  14. spindr0

    spindr0 Active Member

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    There are many ways to skin a cat so I don't have a problem with anyone who has a different way. My issue is when they insist that their way is the best way. WTF? Do what you gotta do and let me do what's best for me.

    Mr. Market is paying and will continue to pay for all of my needs until the day I'm roasted. I'd never risk that for "X" percent more yield per year. I'm playing in the middle, leaving the extremes to others. I SWAN.

    Props for riding the BTC wave up. /\/\/\/\/\/\
     
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  15. Dave Kraayeveld

    Dave Kraayeveld Active Member

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    Amen, that's what makes America great. Options. Yogi Berra once told me that if you have cash on hand you will always have money. I learned a long time ago you cannot talk anyone into your way of thinking. If you could, other people could talk them out of it. I truly wished I had saved all the paperwork of all my purchases. My first was Seagate which doubled, my second was Microsoft which I bought at 97 and sold at 27. At 65, I do get frustrated that it seems people are easily offended by a different opinion. I have been blessed to have a handful of friends I can call and ask them. "Why is the purchase I am considering a bad decision". I need a biblical Nathan. I wonder if Gabriel owned Yamaha stock. I heard they make a good trumpet. Yamaha was trading at about 35 last year. Now over 58. You have to remember I am related to the "unknown comic" from the 70's. Hope I made you smile
     
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  16. spindr0

    spindr0 Active Member

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    "You have to remember I am related to the "unknown comic" from the 70's. Hope I made you smile"

    Henny Youngman, you're not.

    ;->)
     
  17. Rustic1

    Rustic1 Well-Known Member

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    I dont get offended, most here take me to serious. I actually like to debate to see both sides. Sometimes I get slapped in the face with reality and learn from my mistakes. I have a sense of humor. During the recent election, I snuck out at night and swapped signs " red to blue" with some neighbors just to watch the arguments.

    If we all agreed, the world would be boring.

    At this point, I will stay mostly cash and hold my 3 positions until I see how the next few months react. We are in unchartered territory and some of these companies are priced ridiculously high, real estate is a joke. To many people are still sidelined, yet we keep setting new highs. I'm out and patiently waiting. I can make my nickel and dime trades and pay the freight.
     
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  18. Dave Kraayeveld

    Dave Kraayeveld Active Member

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    Well like stock research. Henny Youngman 1937-1974 nice pick. Long career. The unknown comic 1970 through 1990. His reviews are way below Henny Youngman, but a 20+ year ride as a comedian ain't bad.
     
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  19. spindr0

    spindr0 Active Member

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    Funny that you mentioned the sign swapping. I have a friend in the neighborhood who's a hard core political activist. We switched the color of his yard sign and put the replacement on his roof. Since he's afraid of height, he had to scramble to get someone to replace it since none of the neighbors would.

    I have lightened up on directional positions and the existing ones are hedged, offering maybe 15% upside in 6 months and no loss for the first 20% or so of drop. Prices have gotten too high too quickly and at some point, the bubble is going to pop. The question as always is, when. I wish that my crystal balls worked better.
     
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  20. Dave Kraayeveld

    Dave Kraayeveld Active Member

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    AHHHH Algorithm, In 1969 it was a math concept. Now Google uses it to redirect to their way of thinking.
     

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