Friday, October 10, 2008

How This Retiree is Dealing with Stock Market Collapse

One of the benefits of retiring in my forties is having time. Unfortunately, early retirement also gives me ample time to watch the collapse of the stock market. The precipitous drop in the stock market completely surprised me. It is amazing that the indices have declined more than 20% in the first four days of this week. I have never lost so much money so quickly.

However, being retired has also given me more time to think about what to do. Here are my thoughts:
  • Hold what I've got. Since I don't need the money for at least five years, I don't want to be guilty of buying high and selling low. To sell at this point would guarantee losses of over 30%.

  • Don't buy into the downtrend. On the other hand, I don't think now is the time to buy either. After experiencing buyer's remorse for stock purchases made just before the bailout vote on October 3, I've decided to return to my buyer's strike approach. I'm going to wait for a noticeable reversal before investing large amounts of new money.

  • Hedge against losses. Unfortunately, I have closed out our only hedge. I sold the bear funds from October 1 - 7, expecting (incorrectly) that a bottom would occur with a bailout bill passage. So we are no longer hedged with short positions against a further downturn.

    When there is a short term rally, I will look to buy inverse index ETFs or a bear mutual fund again.

  • Develop a buy list with capitulation buy points. There are some great stocks that have been beaten down significantly. Google is down almost 60% from its high. Amazon, almost 50%. I would be happy to get either of these stocks 80% down from their highs, even if the market hasn't demonstrated a turnaround. However, I would only take small positions, less than 0.3% of my portfolio.

  • Take advantage of high volatility. With the VIX in the 70s, option premiums are very high. I had already sold some covered calls on my company stock in the retirement account.

    I am also considering selling one or two short term, out of the money puts for stocks on the buy list to be developed. In the worst case, I may be obligated to buy 100 shares of a quality stock at a significantly lower price. In the best case, the option expires and I keep the premium.

    In addition, should the market rally significantly, we may sell some stocks that have gains.
  • At this point, we do not need any of the funds invested in stocks for five years. As part of our early retirement plan, we set aside enough cash, CDs and bonds for several years of expenses. If the market is still declining in 2010, we'll need to revise how we handle our stock investments.

    For more on Reaping the Rewards , check back every Friday for a new segment.

    This is not financial advice. Please consult a professional advisor.

    Copyright © 2008 Achievement Catalyst, LLC

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