Don’t Get Gobsmacked By A Market Crash

Around the age of ten, I used to learn some form of dance and our dance school would often host group stage performances. In one dance play, I was to be one of the many deers, hopping in the background, at a certain rhythm while an older couple romanced each other as ‘Radha Krishna’. It was important that we all hopped in a synchronized way. I felt responsibility on my shoulders and was beyond excited. It would be my first stage performance. The day arrived – our faces were painted yellow with white polka dots. With our right hands shaped like snouts and left ones as tails, there we were, fine little deers, lined up in the back stage. I couldn’t wait to do my part and exit the stage like a flawless true performer.

Except, that I missed my cue. My usually supportive dance teacher gave me a whack on my shoulders, I jumped in fright, entered the stage and started hopping out of rhythm – limping almost. What is worse, is that I could not get back my rhythm at all! The performance ended and we exited the stage.

I never forgot that day. Not because I was surprised by the whack on my shoulders. I hold no grudge against my teacher. It was the whole unpreparedness of the situation, of being gobsmacked into limping despite all the practice and preparation. I have a feeling that my misery was many times greater than the joy I would have felt after giving a flawless performance. That limping awkward deer in me lives on.

Which brings me to ask – “have you ever been gobsmacked? By the markets I mean. How did you fare”

This maybe a good time to revisit “ the prospect theory”. Put simply, prospect theory suggests that losses hurt more than gains give pleasure. Scientists have assigned a number to this magnitude. It turns out that losses hurt about twice as much as gains give happiness. So, even if your risk profiler shows that you are a risk-taker, when you are faced with an event when the portfolio falls by 30%-40%, is there a chance that you could resemble me, limping out of rhythm on stage?

Let’s tackle that million dollar question:

Is it possible to prepare for a crash?

I don’t have a definitive guide for you but I have tried to put together a few learnings from the multiple crashes that I have been in.

1) If you need money for anything at all – not just emergencies – maybe for a down payment of that house you have been planning to buy; elderly parents at home; children in college or any such situation, just ensure that you have that quantum in a fixed-income portfolio. Fixed deposits are also fine – Don’t let them shame you. This is not only good old ‘asset allocation’, but also from a very tangential perspective. When the crash does happen, and you do need some money, your equity can stay where it is and you don’t have to touch it. ‘It is important to have a fixed income portfolio in order to continue having an equity portfolio.’

2) Take a good hard look at what you hold and ask yourself a simple question – ‘Which ones of my holdings may have been a mistake if we were not in the middle of a bull run?’ Be honest with yourself that those picks have been pure play ‘luck, not skill’ items and cash out.

3) Each time you happen to cash out, prudence call for you to put the money back into your ‘can’t be mistakes’ holdings and forget all about it. Come back to the portfolio only when you have surplus to invest. However, I have a different take. I say, when you cash out some profits, especially when it is in the ‘luck, not skill’ bucket – reward yourself with something grand. Maybe that piece of jewellery that you have longed for, an expensive gadget that you couldn’t afford or a vacation! You could also give back – fund a poor family, meals, vaccines – do something that rewards you, your soul.

This accomplishes two things.

1) It puts a break on your obsessive-compulsive behaviour of checking your portfolio every day in the midst of a bull run. It lets you breathe and enjoy the fruits of your labour.

2) It gives you a sense of accomplishment. After all, money is what money can buy. Spending it, in any form does feel liberating. So spend some, save some.

Your rhythm in the crowd of people who are all making money, may slip someday too. You could be that limping deer. The one that loses all motor control and cannot get a grip. So stop staring at your portfolio and start preparing for the time when lights will go off and the spotlight will be on you ! I wish you luck, don’t get gobsmacked.