What's happened to my portfolio in the last 2 weeks?!

bowlhead99

TrustyOven wrote: »

(incidentally, why are there many more investment / personal finance blogs from the US compared to the UK?).

If you're willing to indulge in generalisations, a variety of reasons:

- Performance: US markets have generally delivered slightly better returns than UK markets over the last century and the US levies lower taxes. Hence, greater temptation to invest.

- Capitalism: US is more capitalist than anywhere else in the world and US residents can less afford to rely on state support for retirement and other future spending needs. Hence, greater need to invest.

- Technology: while internet penetration is now similar in the US vs UK, if you go back a decade or two, US has always been a global leader in developing websites and internet presence. Hence their finance sites have been established longer.

- Arrogance/ self confidence: Not only do Americans seek financial reward through advertising-funded websites but they love to massage their egos by having people follow their opinion, activities and life story, giving them status. Self gratification and/or cash for advertising clicks, plays a part in the number of people coming up with sites, while Brits as a population are traditionally more reserved.

- Population: There are 5x as many people in the US hence you would expect 5x as many US sites even without the multitude of social/cultural/economic factors which abound.

masonic

Ryan_Futuristics wrote: »

Well the 25-50% rule is as much about maintaining an acceptable level of volatility as it is returns ... But it's also a fairly old rule, when bonds and gold were better alternative asset classes

I must admit, it's one I've never heard of - and even some cursory googling left me none the wiser. The only asset allocation rule of this type I can think of is the 100-(your age) as a percentage in equities, which of course has its own caveats, but I digress.

The best returns you can get are being 100% equities if you bought at the bottom of the market ... If the market's overvalued (even slightly), you're really best out of it.
<snip image>
The green line in this example demonstrates being 100% bonds as soon as the S&P500 goes above a CAPE 20 (in the early 90s); then switching back into equities when it dropped below (in 2009's dip)

So being out of the market through two major bulls, yet achieving comparable returns with much lower volatility, and no guess work

Obviously today the US is at 26.6 ... Which is why I avoid US equities

That chart sort of proves my point. The green line is a switch from 100% equities to 0% equities, which is closer to my 45-90% suggestion. A 25%-50% equities option would sit closer to 100% bonds line. This Trustnet chart of similar data suggests 100% bonds (albeit global in this case) delivered just over a 250% return during that period, while 100% S&P500 delivered closer to a 800% return. During the vast majority of that time, the S&P500 was overvalued both in absolute terms and relative to other global markets, with most of the growth spurts occurring, ironically, while the CAPE was above 20. So I'm not disagreeing that this type of tactical switching can't smooth returns, but you can still get the benefit while setting the ceiling for equities as high as 100%.

Yet, it's the purple line from your chart above that gives the best returns and that's an actively managed 100% equity approach. As I've pointed out before, it's likely that a significant contribution to the outperformance of the purple line is the global diversification vs. just investing in the S&P500. So I'm happy to agree that being 100% equities in an S&P500 tracker does not constitute a good portfolio and in fact a globally diversified portfolio of equities would sit closer to the purple line.

The problem with wanting to be 90% equities is you could be waiting indefinitely for the bottom of the next drawdown, so maintaining cash or alternative assets (I'm liking P2P lending's 7% returns at the moment) gives you the ability to keep buying cheap when opportunities arise

(Otherwise you're stuck thinking of equities as a long-term investment, and praying that the general upward trend of the markets can continue ... I'm doubtful)

This is where I think we fundamentally disagree. I'm not trying to catch the bottom of the market. I don't think it is possible to do so, even by apparently clever use of backtested valuation metrics. I agree it may be useful to dial back certain markets that look relatively expensive, although I wouldn't do so as significantly as halving my exposure (let alone selling up completely)... and I do think of equities as a long term investment and believe the general upward trend will continue.

guymo

Ryan_Futuristics wrote: »

E.g. If you're drip-feeding money, if you simply buy the gap between market peak and current value, you'll always be buying more when markets are down, and correcting your percentage loss (which means your investments boom when they come back up)

I can't quite figure out what this means in practice. It sounds like something related to value-averaging but not quite the same. Would you mind explaining a bit please?

adindas

Nobody like loosing their money. But everybody like to gain over 25% (say) much more then the best available saving interest rate.

But when people are losing £200+ on 6k portfolio and start worrying then they probably have a severe problem with taking risk ?. In the future you might be loosing a few grands more but similarly you could also gain or even double your money.

With your current attitude, you will probably be better off to keep your money in saving or high interest current account. It is guranteed you will never loose your money again .....

Ryan_Futuristics

TrustyOven wrote: »

Ahh so that's the 25% to 50% of total wealth (probably excluding investments tied up in a pension). Mine's currently 13%, but I'm growing that slowly.
What to put it the other 75% to 50% ? Cash? Bonds? Commodities / precious materials?

This reminds me of the Permanent Portfolio (from ERE wiki (incidentally, why are there many more investment / personal finance blogs from the US compared to the UK?)).

Well it is an old rule, and it really comes down to the level of volatility you're willing to accept

As for alternative asset classes, that's a real head scratcher ... Bonds are looking expensive, commodities don't necessarily build wealth so much as fluctuate, and there's a lot of skepticism and volatility around precious metals

Many hedge fund managers are holding a lot of cash now - you could maintain 25% in cash (enough for emergencies and to buy stocks when prices drop), 50% in the market, and 25% in an alternative asset class, like P2P lending - I'm happier to go higher on stocks with a value-based approach (because there's less chance of buying expensive)

See, the reason the Permanent Portfolio doesn't look good today is long-term bonds aren't what you want to be holding as we enter a rising interest rates environment, and precious metals don't seem to offer protection against market and currency fluctuations (they can just as easily go the same way today)

Another pseudo-asset class that's popped up is the Real Return or Absolute Return fund - which is going long and short on stocks to try and maintain a steady income, more like bonds (while bond funds look risky)

Ryan_Futuristics

bowlhead99 wrote: »

Maintaining cash gives you the ability to keep buying cheap when opportunities arise. Maintaining p2p 7% loans usually does not, because you have to commit to a long term. As the loans or the interest thereon gets repaid periodically, you need keep recommitting it to another long term loan in order to keep your interest rate rate up.

And when your target equities become suitably cheap in a couple of years, in order to access those equities with your "alternative assets" you have to look for an exit from the p2p asset, which in many cases cannot be sold on the secondary market without taking a haircut, if at all.

If you want a portion of your assets in an asset class that can give better returns than cash with extra risk (although can't be held in a tax wrapper) then p2p is fine. However, most p2p schemes aren't suitable for swift liquidation to hop into equities. The ones that can be liquidated at short notice without cost/risk, don't pay 7%, so far as I know.

I suppose if equities become raucously cheap you could throw all your spare cash at them and then wait a few years for the p2p to mature to top your cash back up again, but it's hardly as liquid as cash or other listed assets such as bonds, so it doesn't work so well for indulging in market timing games like playing the CAPE.

Absolutely, but then again with a bond ladder you're sort of in the same boat (and a 1-5 year bond ladder seems like one of the few alternatives with the rate hikes looming)

I'm just experimenting with Funding Circle at the moment - I probably won't have more than 10% of my portfolio on there, and it's paid back monthly on average over about 3 years ... I'm seeing it more as a way to do something with cash I'm probably not going to need immediately

I'm thinking of turning this Autobid feature off as soon as the money's all invested, and just letting it filter back in - then turning it back on again depending on how things look, whether I need to top up cash reserves, etc. That's how I'd probably conceptualise it: somewhere to put maybe half your cash reserves .. Wall Street seems to be embracing it now

Ryan_Futuristics

Thrugelmir wrote: »

Are prepared for the risk of capital loss?

Well I'm really just dipping my toes in with it at the moment

I'm using Funding Circle, and I've got it set to lend no more than 1% of my investment to any one company - so it's diversified much like a bonds fund ... My average interest is actually 10%, but on past history they estimate (after bad debts and charges) that should net about 7%

I don't think it should be any riskier than bonds ... I think my only caution is the "unknowns" - like how do these loans respond to financial crises? Perhaps if we got a repeat of 2009, all these small companies would be defaulting? No one knows how this is going to navigate market conditions ... Also they may wind up over-regulated and besieged by fund managers, and quickly become unappealing investments - but right now, 7% interest in these markets seems like a good thing to do with spare cash reserves

Ryan_Futuristics

masonic wrote: »

I must admit, it's one I've never heard of - and even some cursory googling left me none the wiser. The only asset allocation rule of this type I can think of is the 100-(your age) as a percentage in equities, which of course has its own caveats, but I digress.


That chart sort of proves my point. The green line is a switch from 100% equities to 0% equities, which is closer to my 45-90% suggestion. A 25%-50% equities option would sit closer to 100% bonds line. This Trustnet chart of similar data suggests 100% bonds (albeit global in this case) delivered just over a 250% return during that period, while 100% S&P500 delivered closer to a 800% return. During the vast majority of that time, the S&P500 was overvalued both in absolute terms and relative to other global markets, with most of the growth spurts occurring, ironically, while the CAPE was above 20. So I'm not disagreeing that this type of tactical switching can't smooth returns, but you can still get the benefit while setting the ceiling for equities as high as 100%.

Yet, it's the purple line from your chart above that gives the best returns and that's an actively managed 100% equity approach. As I've pointed out before, it's likely that a significant contribution to the outperformance of the purple line is the global diversification vs. just investing in the S&P500. So I'm happy to agree that being 100% equities in an S&P500 tracker does not constitute a good portfolio and in fact a globally diversified portfolio of equities would sit closer to the purple line.


This is where I think we fundamentally disagree. I'm not trying to catch the bottom of the market. I don't think it is possible to do so, even by apparently clever use of backtested valuation metrics. I agree it may be useful to dial back certain markets that look relatively expensive, although I wouldn't do so as significantly as halving my exposure (let alone selling up completely)... and I do think of equities as a long term investment and believe the general upward trend will continue.

Well in today's markets - propped up by all this QE - I'm hesitant about being more than 50% in ... As Warren Buffet says: Only when the tide goes out do you see who's been swimming naked

I think that Trustnet chart shows the same thing, where the two practically touch on the dip (which is where you'd have briefly switched into equities), but where US equities have continued to rocket under stimulus ... What will the equities line look like after the next dip? (To get back down to a CAPE 16, US equities need to almost halve)

I'd say, if you're a value investor, you probably can have a 90-100% equities allocation (although I'd not feel safe without at very least £15k in cash) ... The Global CAPE line on that chart comes from buying regions which can't get much cheaper ... But you also have to appreciate that recent history tells us nothing of where markets may go - every major market's experienced 20-30 year downturns before, where being 100% equities would've just seen your capital slowly rot away ... For buy-and-hold investors, I'd always prepare for the worst case scenario

Ryan_Futuristics

guymo wrote: »

I can't quite figure out what this means in practice. It sounds like something related to value-averaging but not quite the same. Would you mind explaining a bit please?

I can post a graph when I get to my computer

It's a very loose rule - you can adapt it to your savings rate or drip-feed, use whatever multiples you want - but in essence, it could go like this, making an investment on the first day of each month:

FTSE 100 market peak is 6,900 (ish)

- January: FTSE 100 is at 6,700 ... The difference is 200, so you add £200 to your FTSE 100 tracker
- February: big drawdown, FTSE 100 is at 5,000, so you add £1,900 to your tracker
- March: super-bull market, FTSE 100 breaks 7,000, so no investment this month (or you may have an arbitrary £100 monthly investment just in case the market keeps rising)

Over many market cycles, it means you're buying much more on dips, and pushing the average price you're paying for shares well below their average market value (no matter where you enter)

It is a bit crude, and you'd have to plan whether you could maintain it when markets dropped to 3,500, or how you'd apply it to active funds, whether you'd have enough money in the market in the event of a 5-year bull market (constantly breaking new highs), and it doesn't by any means tell the whole story of where the market's at

So it's perhaps more a concept you can turn to during times of uncertainty (like the recent dip: will it keep falling, or is now the buying opportunity?)

In principle, you should be doing something like this, but using a valuation metric instead (like CAPE, or Price/Book) - the UK's a good example of why, because even if we break 7,000, our market's not necessarily expensive (with inflation and average earnings taken into account)

guymo

Thanks, that's clear. It is a bit like value averaging I guess: if you had an initial investment of £6900 in your example, the moves you'd make would keep the total value of your investment steady at £6900 until the FTSE broke its peak.

(With value-averaging things work a little differently, in that you estimate a rate of return and top up your fund so that the value of your investment grows steadily at that rate -- but you also withdraw funds if the value breaks that rate. This way you not only buy low, as in the strategy you've described, but also sell high. If I recall correctly, this method has higher expected returns than dollar-cost-averaging, and lower risk than lump-summing. Of course, nothing is magic.)