Can you cash out before it crashes in?

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   Well, I was thinking something like this: 

Suppose the valuations are getting stretched too much and there is kind of a feeling that a crash is on the offing sonner than later, then what have you planned?

There are 2 psychologies here:

1) Suppose I anticipate the market is going to crash and in fact it does not fall , then we could miss out on the returns on the stock. In this case, if we cash out out entire portfolio then we could miss out on the returns.

2) On the other hand, if we keep our portfolio intact saying "holding good stocks will always pay in the long-term, so I shall hold onto my stocks no matter how many bear or bull markets comes". In this case, in a bear market(if it continues for 1 year or more), I am not going to get appreciation on my stocks so I miss out on a year or two's returns which could be heart-breaking to a big extent.

So what to do here? One of my strategies COULD BE:

1) Take out 25-50% of my portfolio out and put it into a "floating rate" fund to earn some small return out of that 25-50%.

2) The rest I keep in equity.

Now, there are 2 things that can happen here:

1) Bull run continues. In that case, my stock portfolio gives me returns(which minimum could be 10-15%) and small returns out of my non-equity fund.

2) A CRASH takes place within a few months of my anticipating it. In that case my 25-50% earns returns out of the floater fund or some other good fund, while my portoflio goes down and down.

When my portfolio goes down 40% or so(which is what it should go to, when a CRASH OCCURS, else it is not truly a crash), I deploy the 25-50% money back onto the stocks. 

In this case, my bleeding in case of a crash would be lesser and my portfolio would recover faster WHILE in case of a continued bull run(if I was wrong about the crash), I keep earning returns of the market from my portfolio while I earn a small return out of my floater fund's money which I cashed out from the equity(in anticipation of a crash).

When we can apply this practically(which is not at all difficult), the FEAR OF A CRASH would disappear from my our mind as I am ready for it.

I am sure if we get many more thoughts from the members, I should be able to refine this strategy even more and in fact I may be able to even get much better strategies from others. My strategy above I feel is very easy to apply and safe. Only thing it requires are 3 things:

1) Cashing out 25-50% and putting into a non-equity fund.
2) Re-Deploying it back when my equity portfolio comes down 40% or more.
3) Have patience after that.

I think this should get the BALL rolling. What do you think Basant jee:-) Maybe you do not need to set 2010 as a dead-end for 100% cash-out? What say? 

Thanks for taking my input, appreciate it!

Edited by omshivaya - 10/Sep/2006 at 7:42pm