US or European equities - a good time to buy?

redbuzzard

I'm semi-retired at 61. I have a core of occupational pensions that will be enough for the bread and butter, mostly due at 65, but I will be dependent on my savings in ISAs and my SIPP for the jam. The SIPP will be used for drawdown so most of the money will be invested for a reasonable period.

Like most people I have had a decent run since 2009 without needing much investing skill. I've a mix of index funds and actives, the actives being mainly relatively defensive equity or mixed funds (IP Income, IP Distribution, Henderson Cautious Managed for example, plus some First State Asia Pacific Leaders for diversification). I also have c. 15% in Standard Life GARS, which I consider has done its job quite well - it's never exciting to watch in rising equity periods, but it's done what it said on the tin as far as I'm concerned.

I resist ‘trading’ and trying to time the market, but given the general state of the world economy I'm finding it hard to escape the idea that there is more scope for equity markets generally to move down, than up; ditto bond prices, though I was saying that three years ago and was clearly wrong!

Anyway, I want to de-risk materially (I have c. 70% equities in the ISAs, and 50% in the SIPP). After the possibility of a major crash, the risk that looms largest to me is inflation.

I'm reluctant to load up with bonds (see above) so I intend to expand the proportion of absolute return style funds, probably adding some Invesco Global Targeted Returns which is run by some former GARS managers.

To the topic - one of my ideas for the reduced equity portion is to add some US equity exposure. I already have about 5% US index holdings. Although the US index looks fairly expensive too, the US economy looks strong and there is the prospect of some help from a strengthening dollar.

I recently sold a small European exc. UK fund, partly because the fund itself had underperformed, and also because it looks as if the ECB is chasing inflation. But European stocks have been such a drag, I wonder whether it’s time to buy rather than sell? However I think the ECB is probably expecting a weaker Euro, not a stronger one.

At the moment I’m minded to go with some more US index.

Should I be thinking this way, or just taking a more traditional approach to allocation between equities/bonds/property, and rebalancing as necessary?

Apology for the stream of consciousness, if you're still reading...

Linton

You seem to be making some basic mistakes.

1) You say you "resist trading" and then make it clear you dont really want to.
2) You seem to be making the classic mistake of wanting to buy things that look good and sell things that have underperformed - buying high and selling low, a guaranteed way of losing money.
3) You are looking at things from a short term point of view.
4) You are trying to predict the future. Even professionals with specialist knowledge and experience arent that good at predicting the future. If you do try to predict the future you need to spend an equal amount of time on what happens if your prediction is wrong.


The approach I use is....

Split drawdown pot into 3 separate tranches:
- Short term: 3 years income: cash or near to cash
- medium term: 5 years income: wealth preservation focus, bonds, abs return funds, etc
- long term: very diversified equity funds, aim for highest risk & return your nerves will stand.

Then roughly rebalance every year keeping the %'s the same.

This way if there are major falls you are safe for at least 8 years by which time prices should have recovered. But you are not being so cautious that you cannot get a decent return - you could well be drawing down in 30 years time. You dont have to make any difficult decisions or try and predict the future - the portfolio should be reasonably resilient to whatever happens, well as far as any investment portfolio can be.

Thrugelmir

redbuzzard wrote: »

After the possibility of a major crash, the risk that looms largest to me is inflation.

Inflation is good for equities. The problem at the moment is the lack of inflation.

HarryD

redbuzzard wrote: »

At the moment I’m minded to go with some more US index.

Should I be thinking this way, or just taking a more traditional approach to allocation between equities/bonds/property, and rebalancing as necessary?

Nobody knows. Anybody who tells you they do is mistaken.

Voyager2002

HarryD wrote: »

Nobody knows. Anybody who tells you they do is mistaken.

However, it is possible to say that with an uncertain future one approach involves a good deal more risk than the other.

redbuzzard

Linton wrote: »

You seem to be making some basic mistakes.

1) You say you "resist trading" and then make it clear you dont really want to.
2) You seem to be making the classic mistake of wanting to buy things that look good and sell things that have underperformed - buying high and selling low, a guaranteed way of losing money.
3) You are looking at things from a short term point of view.
4) You are trying to predict the future. Even professionals with specialist knowledge and experience arent that good at predicting the future. If you do try to predict the future you need to spend an equal amount of time on what happens if your prediction is wrong.

Thanks Linton.

I don't really disagree with you - hence the pondering I guess. I don't generally deal much at all.

The underperforming (to the benchmark) European fund I sold at a profit; but I take your point. Selling assets after they have dropped, and buying when they have gone up, is the classic amateur investor way of losing money.

My head has always told me to get the allocation right and buy the relevant markets; I almost never buy individual stocks; I'd use all passive but for the fact that I can use defensive equity funds that have a good chance of making benchmark returns with lower volatility.

My head has been telling me this week to lie down until the urge to time the market goes away - I usually do, but I still have an inclination to take some profits from the UK tracker and move a proportion to the US index, which I don't think would be inconsistent with my general approach.

I just wondered if the 'theme' behind that had tempted anyone else. It seems not! Similarly there seems to be a trend for pundits to say Europe looks cheap - I'm unconvinced by that, hence dumping the underperformer without too many qualms.

I must stop reading investment websites.

redbuzzard

Thrugelmir wrote: »

Inflation is good for equities. The problem at the moment is the lack of inflation.

I'm sure George and Mark (not Martin, sorry) agree with that. And as you imply, stocks represent real assets so we expect them to increase in price; but if those stocks are priced in Euros there is a currency risk too - inflation is not so good for the exchange rate.

If I still had a large mortgage I'd be much more enthusiastic about inflation.

I assume the UK government/BoE would both like to see interest rates below inflation for a long time to come. Not so good for those of us living on savings, but the only way there's a hope in hell of cutting the public debt in real terms.

Linton

redbuzzard wrote: »

....
My head has been telling me this week to lie down until the urge to time the market goes away - I usually do, but I still have an inclination to take some profits from the UK tracker and move a proportion to the US index, which I don't think would be inconsistent with my general approach.

.....

Rebalancing is fine - take from the very well performing funds and put the profits into something cheaper. But dont do it too often. Have a rebalancing day once a year at most. Its minimal effort, minimal charges, and gives some time to separate the noise from the longer term trends. You dont want to be continually tweaking on changing inclinations.

Thrugelmir

redbuzzard wrote: »

I assume the UK government/BoE would both like to see interest rates below inflation for a long time to come. Not so good for those of us living on savings, but the only way there's a hope in hell of cutting the public debt in real terms.

Low interest rates has more to do with stability of the financial system than anything else. Assets prices are key to bank balance sheets. A lesson learnt from Japan when their credit fuelled asset bubble burst. The BOE, FCA and PCA appear to acting like sheep dogs very slowly herding the banks in the direction they wish them to go. Still a very long way to go.

Ryan_Futuristics

redbuzzard wrote: »

I'm semi-retired at 61. I have a core of occupational pensions that will be enough for the bread and butter, mostly due at 65, but I will be dependent on my savings in ISAs and my SIPP for the jam. The SIPP will be used for drawdown so most of the money will be invested for a reasonable period.

Like most people I have had a decent run since 2009 without needing much investing skill. I've a mix of index funds and actives, the actives being mainly relatively defensive equity or mixed funds (IP Income, IP Distribution, Henderson Cautious Managed for example, plus some First State Asia Pacific Leaders for diversification). I also have c. 15% in Standard Life GARS, which I consider has done its job quite well - it's never exciting to watch in rising equity periods, but it's done what it said on the tin as far as I'm concerned.

I resist ‘trading’ and trying to time the market, but given the general state of the world economy I'm finding it hard to escape the idea that there is more scope for equity markets generally to move down, than up; ditto bond prices, though I was saying that three years ago and was clearly wrong!

Anyway, I want to de-risk materially (I have c. 70% equities in the ISAs, and 50% in the SIPP). After the possibility of a major crash, the risk that looms largest to me is inflation.

I'm reluctant to load up with bonds (see above) so I intend to expand the proportion of absolute return style funds, probably adding some Invesco Global Targeted Returns which is run by some former GARS managers.

To the topic - one of my ideas for the reduced equity portion is to add some US equity exposure. I already have about 5% US index holdings. Although the US index looks fairly expensive too, the US economy looks strong and there is the prospect of some help from a strengthening dollar.

I recently sold a small European exc. UK fund, partly because the fund itself had underperformed, and also because it looks as if the ECB is chasing inflation. But European stocks have been such a drag, I wonder whether it’s time to buy rather than sell? However I think the ECB is probably expecting a weaker Euro, not a stronger one.

At the moment I’m minded to go with some more US index.

Should I be thinking this way, or just taking a more traditional approach to allocation between equities/bonds/property, and rebalancing as necessary?

Apology for the stream of consciousness, if you're still reading...

I'd recommend this book
http://www.amazon.co.uk/Global-Value-Bubbles-Crashes-Returns-ebook/dp/B00J351PXE

And this perhaps interactive chart
http://www.researchaffiliates.com/AssetAllocation/Pages/Equities.aspx

And a bargepole, to keep away from US equities

jamesd

redbuzzard wrote: »

I still have an inclination to take some profits from the UK tracker and move a proportion to the US index... Similarly there seems to be a trend for pundits to say Europe looks cheap - I'm unconvinced by that, hence dumping the underperformer without too many qualms.

The pundits are right. Cyclically adjusted price-earnings ratios are lower in Europe than the US and one of the more reliable long term trends is that future returns are lower if you buy at high P/E than if you buy at low P/E. What you're doing if you buy the US is speculating, not investing. You're speculating that record high prices will move to more highs. They probably will for a while. Or not. But ultimately you're relying on the greater fool theory.

Rebalancing works and involves selling the things at high valuations to buy the ones at low valuations. Today that means selling the US and buying Europe among other things.

You might also usefully ponder why Europe is at low P/E and why the US is at higher P/E and consider the effect of likely future events. The US started fiscal easing years ago and has benefited from it. That fiscal easing is over and interest rates will start up in the not far distant future, ending two things that help markets. Europe is not really started on fiscal easing so its had a slower recovery, but it will eventually recover. Better to be buying before that, knowing that it'll probably take a while.

If you want to do some speculating on the US, consider a doubly or triply leveraged ETF with a tight stop-loss order or similar in a small purchase of an option or covered warrant that would limit your loss to your purchase price. I might do one of these or something similar, just to try to eke out some profit before the growth runs out of steam and cover the long boom case a bit. I've no idea when it the US market will drop for a while in a significant way. It could take ten years, not ten months or ten weeks. But long term I believe the P/E and I'm underweight the US at the moment, not overweight. There's plenty of time and all I have to do is be patient to get to buy the US at a lower P/E.