Emotions are the reason why many investors buy high and sell low. In order to avoid that I try to detach my emotions from investing.
The market is crashing in average every 12 years, so I should experience 7 crashes in my life and thought that having an action plan would be the way to go.
How do I know if there is a crash?
I have installed the mobile app called Stock Alarm (they let you setup 5 alarms for free) and set up 5 alarms. To keep it simple I take the all time high of VT as the starting-point which is 109 USD (5. November 2021) and defined the alarms like this:
- 20% drawdown = 87.2 USD
- 30% drawdown = 76.3 USD
- 40% drawdown = 65.4 USD
- 50% drawdown = 54.5 USD
- 60% drawdown = 43.6 USD
Every time an alarm is triggered, I get a push notification and an e-mail.
The actions during the crash
After every alarm (same day) I shift the following amounts of non-stock assets to stocks:
- 20% drawdown = 10% of non-stock assets
- 30% drawdown = 15% of non-stock assets
- 40% drawdown = 20% of non-stock assets
- 50% drawdown = 25% of non-stock assets
- 60% drawdown = 30% of non-stock assets
My target allocation looks like this:
- 80% Stocks
- 5% Bonds
- 5% Commodities
- 5% Real estate
- 5% Cash
Which means that I will reduce the other asset classes and eventually end at 100% stocks after the 5th alarm.
The actions after the crash
As soon as a new all-time high is more or less reached (-10%), I sell the stocks to rebalance back to my target allocation (only if needed since I invest every month, no rebalancing might be needed).
Log-book
What happened so far?
12. May 2022 | 16:03
I got the following alarm: “The price of Vanguard Group, Inc. – Vanguard Total World Stock ETF is below the $87.20 limit. The current price is $87.12 ( -$0.95, -1.07%). Notes: Ship 10%”
So I rebalanced accordingly and since my cash position was over 5% I simply just bought the stocks the same day for 10% of the value of my non-stock assets.
14. February to 20. March 2022
The global stock market crashed due to the pandemic. I hadn’t set up the alarms back then but made the same calculations on a note in my smartphone and bought 2x for 10% during the drawdown.