gotta have a plan

Roger Nusbaum addresses how to handle a slow significant drop in the S&P 500 that Jeremy Grantham discusses.

Jeremy Grantham: Brace Yourself for a Slow, 40% Drop

in a slower decline – that is, one without panic – diversification would work and correlation would not go up between investments where it is usually low. In this environment I would want to own foreign currency and bonds, different sorts of countries (commodity based, surplus or in their own world), cash and big cap defensive stocks. All of these come to mind as places to overweight. I would also hope that I had positioned the double short fund well going into this to neutralize some of that decline.

… there is really not much need to correctly predict something like that either. Any time the market goes down a little (not the market condition to fear) it could devolve into down a lot (this is the thing to worry about). You can’t know when it will happen so don’t sweat being right, just stay disciplined and hope to miss a chunk of it.

What would I do? I don’t know but I do know that this is exactly the situation where having a predefined plan would help a lot. Why do I own this stuff? What do I expect to gain by it? How do I know that conditions have changed and some action is required? What is the exit strategy?

A friend teaches “scenario planning” to major corporate clients. So what are the scenarios? What are the trigger points to know which scenario is actually happening? What actions are called for – either for this scenario or for the transition from one scenario to another?

Current scenario :
key factors, position, change indicators, transition issues

Alternative 1 :

Learn more…

Taking stock of risk
Why global markets are more volatile, and how investors can handle it
.. quotes Jeremy Grantham