Well it looks like even with the bail out package being approved in the US the markets are still in a tailspin. When will the markets bottom? I have no idea and anyone that says that they do is just taking a wild guess. So what happens if the markets decide that it might be a good idea to bump the 1929 markets into second place for largest market decline? What impact would that have on your portfolio and your life?

First of all I believe that a market like that should have almost zero impact on your day to day life because anything that is invested in the market should be cash that you don't need for at least 3 years, preferably at least 5 years. If you are in a situation where this isn't true well I hope you are learning a good lesson here. The other thing that may get you in to a little bit of trouble is if you are using margin or are leveraged in any way (using a line of credit for example). I am currently guilty of using leverage but I know I can ride out this market unless margin rules change on me (which isn't out of the realm of possibility).

So what is the worst case for me? I have been investing for income for the last 3-4 years and I have invested mostly in companies that have a long history of paying dividends and increasing those dividends at a rate that nicely beats inflation. So I think the worst case for me is that dividends don't increase over the next 2-3 years. If that happens and we lose another 20% of market value before a slow recovery starts then I will still be in an ok position from a portfolio standpoint.

What else could happen? Well, we could go into a long global recession that starts impacting jobs. What could be the worst case there? We could have no earned income coming into our household which would mean that our cash reserves would last approximately 10 months before we would have to start dipping into cash in our RSP accounts which would last another 2-3 months. After that we could sell off the investments we have with a financial adviser that account for a little less than 30% of our total portfolio and use that to pay off the mortgage. At that point we would need to come up with about $1500/month to be able to continue running the house in 'survival mode'. If the markets only dropped 20% from where they are right now and had stayed there over the something like 2 years (one year to lose jobs and another year to burn through cash reserves) it would have taken to get to the point where we were selling investments to pay off the mortgage our remaining investments would keep us going in survival mode for at least 8 years, probably closer to 10 or 12 years. We could extend that a little bit by selling the house and moving to a smaller house but it is hard to say how much equity we could pull out of the house at that point because I assume that the housing market would have taken a pretty big hit. We could also sell at least one car which could give us around 6 more months of cash.

So for me that is the worst case scenario and that would require the economy to be a total and complete train wreck the likes of which haven't been seen in the last 100 years. It would require the loss of both our jobs, no available government support and a total lack of income for 10-15 years. However if that were to happen we would be in a pretty bad situation. We would be both pushing 50 with our only asset being our house. Which isn't totally brutal but isn't a great position to be in and would probably mean that we would have to work until well past 65 in order to be able to retire.

I don't expect to see anything close to that worst case scenario. In fact, I wouldn't be surprised to see a nice January effect in 2009 and some sort of stabilization through the spring of 2009 (but I don't expect to see any substantial recovery other than in January). However, I think that the worst isn't over yet and we could very easily see the markets down 20% from here before we start to see some recovery. Tax loss selling over the next 2-3 months is going to be hard on the markets but that just means that there should be some cash waiting to get into the markets in January.

What is your worst case scenario? If the markets can't pull out of this decline for 2-3 years (which isn't too far off from what happened in the 2000 correction) will you be able to not touch your portfolio even if you lose your main source of income for the majority of those 2-3 years?