Ritholtz on Portfolio Emergency Planning

Barry’s column in the Washington Post this weekend is a good one, it talks about how investors should prepare for emergencies before they occur, not during.  With a rules-based approach to portfolio construction or management, you will not be immune to market hiccups and freak occurrences but you will also not be helpless and flailing about either…

Emergency planning is what we do before an emergency — not during one. Being proactive, rather than reactive, allows you to avoid the emotional mistakes many people make during unexpected events. That is why you look for the emergency exits before takeoff, not when the wings fall off the plane.

The best way to do this is to have a plan in place. Ideally, you design this when you are objective, unemotional and calmly contemplative.

Three factors should persuade you to this conclusion: First, these “black swan” events are surprisingly common. The so-called 100-year floods come along far more often.

Second, history teaches us that markets wobble then resume their prior trend. Major investment changes during this wobble are ill-advised.

Third, you should have an exit strategy in place for any asset you hold, regardless of what is happening across the world. In our asset management business, we call this having a “stock prenup”: We know what will cause us to divorce any position in advance (regardless of its relationship with the pool boy).

Head over to read the rest, there is some great common-sense wisdom in here.

Source:

Anticipating (Versus Reacting To) the Next Black Swan (Washington Post)