I have often written that investors are less fearful of economic recessions.  There is ample research that “buy and hold” makes sense during such recessions.  It is impossible to predict the exact top or exact bottom.  The level of cash can be adjusted, but only so much that a person can sleep at night.

Likewise, I have often written that investors should be more fearful of a financial crisis.  They happen suddenly and usually do more damage.  Due to the “Black Swan characteristics”, you will have very little time to raise cash as protection.  My recommended practice is to sell 25% of equities at the first derivatives failure and the remainder when the second fails.  This assumes the financial crisis will result from credit issues.

However, there is another kind of financial crisis that could result from a liquidity issues.  A highly respected quant/scientist/physicist/nerd from JP Morgan is predicting the crisis will result from speed — the trading algorithms are too fast for humans to control.  If enough send SELL orders at the same time, it can trigger a flash-crash, or a crash, or a full blown financial crisis.  I am confident he is correct.  Again, as this cannot be foreseen, some analysts recommended you minimize your losses by immediately selling 25% in case it is a mini-crash, but how will you know if it is a flash-crisis and not a full blown crisis.  If you sell 25% of your equities and the market immediately rebounds, you have taken an unnecessary loss.  My thought is sell nothing the first day, but if it continues into Day Two, sell everything at the open.

He also feels strongly that passive investing vehicles, like the widely-loved ETFs, pose another dire threat.  My conclusion is that ETFs are great for individual investors but do indeed pose an dire threat for the market, if they are sold in mass as investors head for the exits near-simultaneously.  It that happens, SELL your ETFs first, before the exits jam.

Lastly, he sees the real possibility of social unrest, like we say in 1968.  That was a very bad year indeed, but it was about an unpopular war, race relations, and economic stagnation.  My fear is that the social unrest would be worse this time, more like the French Revolution, when many were beheaded.  One of the differences between now and 1968 is that income inequality is worse, far worse.  Another is that there are a hundred million more guns out there now than in 1968.  Ominously, another is the ability of social media to orchestrate flash mobs, maybe in front of your house?