Disasters come in all shapes and sizes but they all have one thing in common, no one sees them coming.
- Who woke up on September 11, 2001 and imagined 757’s taking out the World Trade Center Towers?
- Who went to bed on August 23, 2015 thinking the market would open down 1000 points?
- Who is planning to have a heart attack in the next 15 minutes or is contemplating their house exploding from a tornado that is spawned from a fast moving front moving through this afternoon.
The fact of the matter is that your whole world can change in a very short period of time. Some people will be as prepared as possible, most wont. Contingency Planning often gets perpetually put off because it can be time consuming, often tedious, and the benefits of such work may never be realized.
Let’s confine our discussion of Contingency Planning to our Trading lives. Here are a few disasters that quickly came to my mind:
- What if terrorists detonate a “dirty bomb” in lower Manhattan that effectively halts trading for 4 months?
- What if ransom-ware infects your PC, then races through your home network to lock down all your computers while you have a sizable day trade on?
- What if you had a health emergency and were in a coma for the next 3 weeks? Would anyone from your family know what to do with your positions?
There are lots of different scenarios. You can come up with a long list in about 15 minutes.
Actionable Contingency Ideas for Major Disasters
- Have a robust rainy day fund; especially if you depend on trading income to pay bills.
- Download and become familiar with your broker’s mobile app. At a minimum, be confident you can log into your account and close all your positions over your phone.
- Have the phone number of your broker in your wallet so if push comes to shove, you can make one phone call to a “real person” and give the order to “close all positions”
- Designate a Surrogate to take control of your trading account should you become incapacitated. That person should have the legal authority to conduct your affairs. That includes knowing your passwords and potential challenge question answers so they can access your account. Outline in specific terms what you want done in bullet point fashion. Create a packet for the Surrogate to open in case of emergency. Most likely, that will be to liquidate everything and go to cash.
Other ideas for potential short term disruptions
- Say you want to enjoy a 2 week vacation with no trading worries but don’t want to close some nice positions you have on. One idea is to team up with a trusted trading buddy so that you can cover for one another during absences. You can share if-then actionable instruction for him / her to follow. Ex. If $MSFT drops below $55 close the position; At $60 roll up to Jan 60 ATM calls. When they have to be away for any reason, you can cover for them.
- Say you think its reasonable to buy portfolio protection. You could consistently buy an SPY Put Butterfly like 10%-15% out of the money. and roll that every 45 – 60 days. Something cheap enough so the cost will be manageable yet give you downside protection. Shoot for a 10x – 12x payout on your insurance premium. The idea is not to walk away making money; the idea is not to get wiped out completely. When China does a 50% devaluation of the YUAN at 2am on a Sunday night, you’ll appreciate that insurance policy. I guarantee it.
Anyhow, the point of the exercise is to make you aware that disaster is likely to eventually find you in one form or another. Sleep well at night knowing that you and your family have done the prep work and have plans in place to address those events.
