What happens when it all goes wrong?

Over the last few days I've been running the scenario of "when it all goes wrong" round in my head.  I've suggested several times before that I am holding onto around a third of my pension fund as cash in order to take advantage of the stock market collapsing - but I haven't actually decided what i will do when that happens.

And this seems to me to be quite important - if and when the markets crash - later this year or early next year when the Greeks get the boot and China's poor economic situation becomes apparent - I'll need to act really quickly.

Looking back at the 2008, 2002 and 1998 "tits up" moments in the markets, there's some interesting things to observe:

• In 1998 it took 2.5 months for the FTSE 100 to drop 1400 points
• In 2002/3 it took 10 months for the FTSE 100 to drop 1600 points
• In 2008/9 it took 6 months for the FTSE to drop 2000 points

So that shows that the total drop is getting longer, and they happen over a period of months rather than days.

This Guardian article lists the top 10 largest falls in the FTSE 100 ever.  The range is 5.58% to 12.22%.  All but one were in the 2008 or 1987 market crashes (it was in 2001). 

So, what does that information tell me about trading strategy?  Well, firstly a drop over 5%+ should indicate that it's time to buy.  Secondly, there's no reason to panic - these collapses last months rather than weeks.  So, with that in mind, a 5%+ drop should indicate that its time to double the rate of market investment to start eating into that reserve fund - so investing around once every 16 days or so.

With regards individual shares, market panics usually lead to wholesale sell offs before the wheat is sorted from the chaff - so buying into the big reliable companies first is probably prudent, as they are likely to rebound faster.  Smaller stocks are more likely to spend time in the doldrums whilst analysts try and work out what to start recommending again. 

Obviously the FTSE 100 is UK listed stocks, although not necessary UK-focussed stocks (think about all those miners from post-Soviet states).  International diversification will be key - who'd want to rely on one potentially knackered market when they could have the safety of exposure to many?

My first go at a list (to be bought in this order) would be something along these lines:

• Unilever - big, international, selling something everything needs
• Microsoft Corporation - totally market dominant
• eBay- Paypal will give this company amazing growth, and the auction site is market dominant internationally
• LinkedIn Corporation - great growth story, with a high alpha (market correlation)
• ARM Holdings - this and Imagination between them dominant the chip market for mobile devices
• Imagination Technologies Group - as per ARM Holdings
• XP Power - great growth stock exposed to the far eastern market
• Golar LNG - 100% utilisation at the moment, a play on the global gas growth trend
• Fenner plc - if you want conveyor belts for mining, this is the company you go to.  Late in the list because commodities arent going to be bouncing anywhere at the end of their supercycle

I'll update this every couple of months whilst we wait for the day stocks get cheap.  Remember Baron Rothschild: "Buy when there's blood in the streets, even if the blood is your own."