What will you do when your portfolio will drop by 30-40%?

By: ispeculatornew
Date posted: 03.17.2011 (5:00 am) | Write a Comment  (10 Comments)

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Panic! It is usually what happens when markets crash, no matter if we are talking about real estate or the stock markets. Like all of you, I work hard to save money, trying to build myself a nice and solid passive income portfolio  in order to profit from life at its fullest. But until you only own government bonds (and even then), you are vulnerable to a major crash. They have happened several times over the years and one of the reasons why crashes do actually occur is because of the panic that is created by the rapid and what seems like a non-ending decrease in value.

Being in a roller coaster when it’s pitch black

Roller coaster rides are fun, they create adrenaline, stress and emotion like few things can do in life. The stress is limited however because you usually:

-Can see what is ahead of you
-Know that the outcome will be fine

A market crash is a much more scary proposition

First off, when markets start falling off a cliff, it becomes easy to panic, as newspapers and others start discussing “end of the world scenarios”. Not only do we not know what’s ahead but it can become very emotional when you start thinking about the years that you spend building up your portfolio in order to live an enjoyable retirement.

Now is the time to think about it

No matter how many people will tell you how to react in the next crisis, it is so emotional for many that they can act very irrationally. That is why I think today is the perfect time to think about how you will react when this will happen to you. I did say WHEN and not IF. No matter how much you’d like to escape this reality, the truth is that the market crashes every few years and you will be a victim at some point.

The worst thing you can do

Since the stock markets have existed, every market crash has been followed by a recovery. Some take weeks, others years but other than perhaps the incredible decline of the Japanese Nikkei, which is an entirely different scenario as the whole Japanese economy fell off a cliff, others have recovered fine. Unfortunately, when investors, especially ordinary ones such such as you and I, lose 20%-30% or even more of our portfolio value, it becomes easy to panic and do things that we will regret. I know some who have done it. After losing 20-30% of their portfolio’s value, they decided to sell everything else in order to avoid a disaster. Of course, when the markets recovered, they did not own the assets and while every other investor started breathing much better, these investors felt like they had just been ran over. They had “suffered” the entire market collapse without enjoying the rebound.

What you CAN do

-If you cannot afford or live with losing 30-40% of your portfolio, DO NOT invest all of it in the market

So what will  you do when the market goes through its next crash?

I know that I will keep my assets, and even continue putting money, in the same way. But I know that we are all different and I would love to hear your thoughts on this.

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  1. Comment by Financial Uproar — March 17, 2011 @ 3:30 pm

    You suggest the Japanese market may not recover from this disaster. How does it differ from any other crisis that’s ever struck the markets?

  2. Comment by Ravi Gupta — March 18, 2011 @ 6:47 am

    I haven’t started investing yet but one thing I would like to consider doing is seeing money invested as lost money. I’m looking at going into ETFs and when it boils down to it I won’t invest money which I cannot stand to lose. Ultimately I believe that any financial instrument is a gamble and should be treated as such. Life is full of risk and the we should consider the risk of something bad happening as 100% before taking the plunge into the financial world.

    -Ravi G.

  3. Comment by Stephen — March 18, 2011 @ 1:55 pm

    I probably would do nothing just like this time. I’m not sophisticated enough to know when to get out and when to get back in. I should throw in more money as the market tanks, but unfortunately I don’t have that kind of steely nerve.

  4. Comment by 101 Centavos — March 21, 2011 @ 4:22 am

    I keep at least 30% in cash, and even more in some accounts. A crash will occur, just don’t know exactly when. Being fully invested leaves no resources for bargain hunting.

  5. Comment by Jon — March 21, 2011 @ 5:46 am

    I’ll do exactly what I did the last time – shop for bargains. I always wish I had more cash on hand when market drops occur.

  6. Comment by Jerry Matson — March 21, 2011 @ 11:37 am

    I’ll buy the dips.

  7. Comment by Open source portfolio — March 21, 2011 @ 2:11 pm

    YOu know what? it’s on my bucket list! I want to feel my heart drop as my portfolio drops with it.

  8. Comment by aj — March 21, 2011 @ 6:53 pm

    “be afraid when others are greed and be greed when others are afraid…” W.Buffett

  9. Comment by IS — March 21, 2011 @ 8:13 pm

    @Financial Uproar- I do not actually mean the most recent decline but rather the 50%+ decline from the 90s..which the market has yet to recover from 20 years later

    @Ravi Gupta – Risk yes but also potential reward..but it’s important to consider the downside, no doubt about it

    @Stephen – How long until you are?:)

    @101 Centavos – Were you able to do some good shopping in the most recent crisis

    @Jon – Nice, did you keep them? Any interesting buys?

    @Jerry Matson – Best way to do it, no doubt

    @Open Source Portfolio – Haha… I’d be just fine avoiding it believe me:)

    @aj – Couldn’t say it better than Warren:)

  10. Pingback by Weekend Reading 3/19/2011 — Dividend Monk — April 15, 2012 @ 1:12 pm

    […] What Will You Do When Your Portfolio Will Drop By 30-40%? Intelligent Speculator asks this important question that every investor needs to be prepared for. […]

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