Achievable Pessimistic Portfolio

Chris75

I have a portfolio spread accross a number of unit trusts, as ISA's, but I am becoming increasingly convinced that over the next 12 months the only way for stock markets is down - and possibly quite spectacularly. I know that for the current prices to be achieved there is someone else who believes the only way is up but hey thats life. I also believe that bonds are at a peak and that they are headed down as well.

My problem is where to hide my portfolio monies whilst waiting to arrive at a moment where I am looking at growth funds again. I have no interest in income.

Having read the blurb Troy Trojan & CF Ruffer are most often highlighted but these are closed funds at least as far as my fund platform is concerned.

So which available unit trust funds are likely to be best protection against
a strong market correction in both shares and bonds and which have a management team who have proved their pedigree in similar circumstances eg 2008 and 2011.

Linton

Chris75 wrote: »

I have a portfolio spread accross a number of unit trusts, as ISA's, but I am becoming increasingly convinced that over the next 12 months the only way for stock markets is down - and possibly quite spectacularly. I know that for the current prices to be achieved there is someone else who believes the only way is up but hey thats life. I also believe that bonds are at a peak and that they are headed down as well.

My problem is where to hide my portfolio monies whilst waiting to arrive at a moment where I am looking at growth funds again. I have no interest in income.

Having read the blurb Troy Trojan & CF Ruffer are most often highlighted but these are closed funds at least as far as my fund platform is concerned.

So which available unit trust funds are likely to be best protection against
a strong market correction in both shares and bonds and which have a management team who have proved their pedigree in similar circumstances eg 2008 and 2011.

With equities you should be investing for the long term, so what happens in the next 12 months should logically be pretty irrelevant to what you cash-in in perhaps 20 years time. Fine, you could go "safe" now but there are two possibilities that would be poor for you. The first is that your prognostication for the next 12 months is wrong and you miss out on growth. The second is that it is right but you dont get back into normal funds in time when the recovery happens and so buy back at a higher price than you sold. The one good option is that you are right and you catch the recovery when prices are still low.

This sounds like very high risk investing to me.

As to what you can invest in should you really want to go safe...

1) Cash - inflation is low and will probably stay low, particularly if your crash happens
2) Look at some of the ITs. A few focus on wealth preservation. Ruffer) Investment Company, LSE:RICA, is one.
3) Bonds - if the equity crash happens probably bonds wont fall badly at the same time. I like Strategic Bond funds at the moment as they have flexibility as to they type of bonds they use.
4) Absolute Return funds. Bit of a mixed bunch. Some have failed rather badly to achieve their objective of a consistent return in good and bad times, a few others look pretty good.

Much better though I think is a broadly diversified portfolio where you can rebalance to take advantage of falls in particular assets to buy cheap investments that will be sold later when prices improve. And if the falls dont happen you gain by the growth.

kidmugsy

Personal Assets Trust
Ruffer Investment Company.

Ryan_Futuristics

You'd normally say property or gold - but with a potential property bubble (and rates rise around the corner), and gold being gold, I wouldn't bank on them either!

It's cash ... I'm moving 10% of my portfolio into Funding Circle (P2P lending to small businesses with an estimated return of 7% - which seems very reasonable at the moment, but of course it's a new asset class, so there are always unknowns)

Otherwise ... I think many agree there should be some kind of drawdown in the US (which is likely to drag us all down) - however we don't seem to have the same kind of systemic problems we had in 2008 ... Having said that, by valuation, there are still very cheap regions and good buying opportunities in equities out there today, and my approach is to keep buying what's cheap and maintain large enough cash reserves to buy in the event of a drawdown (as they say, bull markets climb a wall of worry) - UK markets don't look historically expensive ... I'd also consider equity income

Chris75

At my age 10 years is a long time. Capital appreciation is less important than capital protection.

I know what you are saying but there is some logic in my argument. The stock market tends to fall quickly and rise slowly. This means that there is time to buy back in once a better valuation has been achieved but there isn't time to get out if a fall begins to occur.

I would also observe that this is not an either/or situation but more a question of how to move the balance.

Cash - not really an option unless as an absolute last resort & I am not that desperate.
IT's - yes Ruffers is one that has come up but are there others of similar quality that might be suggested?
Bonds - It depends on which comes first the fall in equities of the fall in bonds. I tend to think that the stock market is ruled by emotion & the bond market by the head. I already have what I previously thought was a good balance between different investment classes including bonds but my concept of a good balance has changed.
Absolute Return Funds - I know what they say they do but very few seem able to do it even in benign times. I will be interested to see what happens if things get nastier.

Ryan_Futuristics

Chris75 wrote: »

At my age 10 years is a long time. Capital appreciation is less important than capital protection.

I know what you are saying but there is some logic in my argument. The stock market tends to fall quickly and rise slowly. This means that there is time to buy back in once a better valuation has been achieved but there isn't time to get out if a fall begins to occur.

I would also observe that this is not an either/or situation but more a question of how to move the balance.

Cash - not really an option unless as an absolute last resort & I am not that desperate.
IT's - yes Ruffers is one that has come up but are there others of similar quality that might be suggested?
Bonds - It depends on which comes first the fall in equities of the fall in bonds. I tend to think that the stock market is ruled by emotion & the bond market by the head. I already have what I previously thought was a good balance between different investment classes including bonds but my concept of a good balance has changed.
Absolute Return Funds - I know what they say they do but very few seem able to do it even in benign times. I will be interested to see what happens if things get nastier.

I think the potential problem you've got to take into account is: What happens if markets don't drop next year?

When do you invest? (Presumably the longer they stay up, the more likely a drop becomes) ... You're sitting out waiting for an opportunity, and when you get it, you still don't know whether you're at the bottom

There's a saying along the lines of "How do you lose half your investment in the stock market? You buy when the market's 90% down, then it drops to 95%"

If you look back even at our recent bull market, every year you had just as many commentators predicting a market crash in the next 12 months ...

I prefer to look at valuation



If you look at the FTSE 100 as it appears - basically cyclic since 1999 - it does look like a drawdown is due ... However if we adjust for inflation and earnings, it actually looks like the market has been getting cheaper

And here's how the CAPE ratio correlates with 20-year annualised returns



You could never do that simply looking at index price without context

So if you ignore optimism and pessimism, ignore the news, ignore predictions, and JUST focus on valuation: well, crash or no crash, that's the only consistent predictor of returns we've got

I'm a pessimist too, so I'm drip-feeding money in, and buying the distance from market peak - so if the market dips 25%, I'll be buying a lot of shares, and if it stays flat, I'll just be tricking money in ... Only other consistent system I know of ... Otherwise it's cash and P2P lending

http://mathieu.bouville.name/finance/CAPE/

TheTracker

Consider Harry Browne's Permanent Portfolio? It is built on the principle that prosperity is good for stocks and bonds, recession is good for cash, deflation is good for bonds and cash, and inflation is good for gold. Buy them all in equal proportions and they may perform a balancing act. Internet Search for more.

edinburgher

Buy them all in equal proportions and they may perform a balancing act

And they may not

TheTracker

edinburgher wrote: »

And they may not

True! "Better together" is a difficult proposition. But the intent is selecting classes of opposing movement vs macro situation. Easier said than done.

jamesd

You could consider options or covered warrants that increase in value if markets drop. These have an initial cost that is lost if markets don't drop before expiration. That initial cost is also the cap of your possible losses/spending on the protection.

kidmugsy

jamesd wrote: »

You could consider options or covered warrants that increase in value if markets drop. These have an initial cost that is lost if markets don't drop before expiration. That initial cost is also the cap of your possible losses/spending on the protection.

Can one buy these things in common SIPPs (especially Hargreaves Lansdown)? Or indeed in ISAs?