Should I put 10K in a US equity tracker now?

masonic

BrockStoker wrote: »

There's also no reason to think it's NOT all the cash the OP has to hand to invest. I don't think it's unreasonable to point out to the OP that IF that is all the cash they are holding then it's probably not a good idea to spend it on US equities right now.

IF that is all the cash they are holding then it's probably not a good idea to spend it on US equities even if they were cheap right now. They should not invest that money at all regardless of what the markets are doing.

Who knows. Perhaps he invested in the dips in Aug/Nov 15, and is doing very well.

Who knows indeed. He did state that the right time to get out of the US after buying in during 2008 was 2010, so if he bought back in during the dips in late 2015, then he would have missed out on gains of 70-80% while out of the market.

He had some pretty erratic views on where was the best place to invest and his descriptions of what he held in his investment portfolio seemed to differ from week to week (as another poster helpfully summarised a while after he disappeared from these parts, never to be seen again. I can't be bothered to go looking for that thread).

But he was consistent and steadfast in his belief that nobody should be investing in markets that were overvalued (which he defined as having CAPE > 15) and the US market, even after that 10% dip didn't come close to meeting that test.

Here's where you're apparently not understanding me. I am invested, and have never advocated sitting with huge piles of cash on the sidelines. Too often on here people think in terms of black and white, but there are plenty of shades of grey in between IMO.

It's not what you are doing that I'm concerned about. It's the guy who is "very underweight in US equity" who has just added £10k to their S&S ISA that you are advising to leave it in cash because Donald Trump might not live up to expectations that I'm concerned about.

I agree wholeheartedly, but wouldn't this also be timing the market, and how do you know, that what you assume to be the end of the crash, really is?

There's no need to call the bottom IMO, although it is nice if you can. The point is, you can look at a chart and see that things have fallen. If they have fallen enough to give you a discount from what they were before, it might well be time to consider buying. Edit: I'm not saying that's all you should be looking at, but it is a start.

You can be sure that at least you have not bought at the top of the market that way, and if you have a bit of luck by finding the bottom (or even close to it), then your portfolio gets a significant boost.

Which is why you sometimes need to be patient, and not use all your cash at the first hint of a correction. I usually hold enough cash for at least 2 purchases of around 5% of my portfolio, but at the same time I wouldn't want to hold more than 15-20% cash at most.

We all take on some risk when we invest. I can see the reasoning behind not trying to second guess the market, however, there are occasions when it's pretty obvious that the market has over reacted in some way. The market is very "short-termist" in it's outlook, and as a long term investor, taking advantage of a short or even medium term movement in the markets makes sense IMO, as long as it's well thought out.

I don't see that there is much more risk in doing this the way I am doing it, with small (but still significant) chunks of cash, whilst remaining 80-90% invested. The effect on my portfolio is that money from my winners gets re-invested in another asset that is cheaply valued, and my portfolio has done comparatively well since I've been doing this.

I'm not saying putting all your cash in in one go at a random time (and not worrying about it) is necessarily a bad thing (or even randomized drip-feeding for that matter), but I actually think I worry less about my portfolio than if I did it that way. Which ever way the market goes I have options. If it goes up, then I'm making good money. If it goes down then I'm scooping up bargains that I hope will have a bright long term future.

It is always lower risk to hold cash for a while rather than invest it straight away. That's because cash is a lower risk asset class. It also leads to lower returns on average, unless you can effectively time the market in order to generate superior returns from a lower risk portfolio that moves in and out of a cash position.

Your strategy seems to be dependent on markets always falling to a lower level than they were when first considered expensive, so that you can invest at a lower price, but this may never happen.

We could just be seeing a manifestation of the Dunning–Kruger effect in your posts, but if not I look forward to seeing the evidence that your strategy has been effective in due course. Do let us know when you deem the markets suitable for your next injection of capital.

jamei305

Well it's done now. Thanks for the advice everyone.

BrockStoker

masonic wrote: »

It is always lower risk to hold cash for a while rather than invest it straight away. That's because cash is a lower risk asset class. It also leads to lower returns on average, unless you can effectively time the market in order to generate superior returns from a lower risk portfolio that moves in and out of a cash position.

Cash certainly helps lower risk, but as you also say, depending on how you use it, it can also boost returns. I get to have my cake and eat it

masonic wrote: »

Your strategy seems to be dependent on markets always falling to a lower level than they were when first considered expensive, so that you can invest at a lower price, but this may never happen.

The beauty of my strategy is that it seems to do best in the good times (since I try to hold "risky"/volatile assets), and since markets tend to do more up than down, I should get more time doing well in theory.

If the type of funds I tend to hold are doing well, then they tend to outperform less high octane funds that most investors tend to hold, so holding the bit extra cash I do doesn't dampen the performance as much as it might do.

If markets were always falling my portfolio would take it on the nose, at least in the short-medium term, BUT, that's where the cash (and patience) comes into it's own. The effect of my strategy here is that my portfolio should recover much faster than a standard portfolio/strategy, or perhaps not faster, but stronger once markets turn bullish again.

The only downside I can see is if I picked sectors/geographic regions to invest in that do not do well, since I'm minimally diversified. I tend to overweight the funds I think have good prospects, which could leave me vulnerable if I picked badly a few times.

masonic wrote: »

We could just be seeing a manifestation of the Dunning–Kruger effect in your posts, but if not I look forward to seeing the evidence that your strategy has been effective in due course.

Dunning–Kruger effect?

Feel free to check my portfolio statistics. I've taken some screen shots, added them to a compressed archive, and uploaded it. Be warned that the first time you click "download" it'll open a new tab/window with spam, which you'll want to close, and then if you click "download" again it should download.

Link: http://www50.zippyshare.com/v/oUwvkMH5/file.html

Notes:
I consider the "start date" of my portfolio to be 280116 since that's when I had my portfolio more or less the way I wanted it, so that is why I've used that date with the fund performance chart. I've also removed the 3 funds which I've added more recently.

The Biotech Growth Trust chart is one I made up last year, and shows all my timed-buys, but I have since sold 30K's worth (311016) and bought 15Ks worth of Polar Capital Biotechnology (041116) since I wanted an extra slug of small cap biotech in my portfolio and very much liked the look of the Polar Capital fund.

The Biotech Growth Trust is the anomaly here, with many more buys than any other fund. I may have got a bit carried away with buying, but I wanted to be overweight biotech, and to me the prices I paid (especially later on) were too good to pass up. I would argue that it helped me hone my timing skills too.

I've also included screenshots of charts that show all buys (timed buy = green dot, non-timed buy = yellow dot) and sells (blue dot) for my second and third largest holdings (Biotech Growth Trust is the first), which together with Biotech Growth Trust make up 47.37% of my portfolio as of 110417.

As you can see, my timing has not always been perfect by any means, but it still seems to work quite well. The figures from my platform are more trustworthy, but not quite as spectacular - my platform reports that:

280116 - portfolio up 22.63% as a percentage of premiums paid (this was basically back to square 1 since my portfolio had paid out ~22% income+fees)

110417 - portfolio up 45.99% as a percentage of premiums paid

So a 23.36% gain over that time period.

If you take the most recent high a few weeks back:

060317 - portfolio up 49.22% as a percentage of premiums paid

I should also note that I intend to, over time, gradually de-risk my portfolio, when I get close to reaching my targets. I'm not exactly sure how I will do that yet, but chances are it will also be unconventional. Please also keep in mind that I'm still learning as I go, and tweaking my portfolio/strategy where I see potential flaws.

masonic wrote: »

Do let us know when you deem the markets suitable for your next injection of capital.

I already did at least once here (and a few more times in random threads on this forum):
https://forums.moneysavingexpert.com/discussion/5595499

However, that thread was intended as more of a "last chance saloon" heads up, rather than "it's the best time to buy NOW" declaration. I probably have shied away from declarations like that, because even I am not 100% certain that it really is "the best time", but with my strategy, if I don't get it right the first time, I will usually have at least one more shot at it.

I do concede, in light of that, it probably was the wrong advice for most people including the OP (sorry jamei and anyone else that it might have been bad advice for), although it seems to work as part of my own strategy.

Anyway, if I see an opportunity, I'll be more than happy to post about it on this forum.

darkidoe

I think there's a point where you can think too much. Hence I decided on an asset allocation and jumped in and rebalanced accordingly with extra funds regularly with an ideal cash buffer in place. Any strategy works. just have to stick to your asset allocation and not chop and change strategy randomly without any major reasons.

BrockStoker

darkidoe wrote: »

I think there's a point where you can think too much. Hence I decided on an asset allocation and jumped in and rebalanced accordingly with extra funds regularly with an ideal cash buffer in place. Any strategy works. just have to stick to your asset allocation and not chop and change strategy randomly without any major reasons.

You are right of course. Everyone should find a strategy which suits them and their platform. I choose too make my investments work as hard as they can for me, and that involves "scanning the horizon" for potential pitfalls or catalysts that might make a particular sector or region an attractive place to invest (or one that might be best avoided for the time being).

It's probably more "work" than most would want to do, but it suits me because both Mrs BrockStocker and I keenly follow the markets and current events/politics between us anyway. To me it's a small price to pay for a significant boost in performance as well as one or two other pluses that arise from the way I do things.

masonic

BrockStoker wrote: »

Cash certainly helps lower risk, but as you also say, depending on how you use it, it can also boost returns. I get to have my cake and eat it

In order to have your cake and eat it by moving between cash and equities, you have to make the right calls fairly consistently. Only time will tell whether that actually happens.

The beauty of my strategy is that it seems to do best in the good times (since I try to hold "risky"/volatile assets), and since markets tend to do more up than down, I should get more time doing well in theory.

If the type of funds I tend to hold are doing well, then they tend to outperform less high octane funds that most investors tend to hold, so holding the bit extra cash I do doesn't dampen the performance as much as it might do.

If markets were always falling my portfolio would take it on the nose, at least in the short-medium term, BUT, that's where the cash (and patience) comes into it's own. The effect of my strategy here is that my portfolio should recover much faster than a standard portfolio/strategy, or perhaps not faster, but stronger once markets turn bullish again.

The only downside I can see is if I picked sectors/geographic regions to invest in that do not do well, since I'm minimally diversified. I tend to overweight the funds I think have good prospects, which could leave me vulnerable if I picked badly a few times.

"Only when the tide goes out do you discover who's been swimming naked."

A very high risk strategy, like the one you have, will tend to outperform by quite some margin during this part of the economic cycle. Holding some cash, as you do, will dampen that slightly, but you'll still do better than someone who is well diversified and therefore holds investments that are better suited to other parts of the cycle. Over a sufficiently long timeframe, you might expect to do very well, and if you can stomach the inevitable massive paper losses a crash would induce in your portfolio, then rebalancing from cash into your worst affected funds will help take the edge off. But, as you say, you are a hostage to fortune and it is still very early days.

Dunning–Kruger effect?

Feel free to check my portfolio statistics. I've taken some screen shots, added them to a compressed archive, and uploaded it. Be warned that the first time you click "download" it'll open a new tab/window with spam, which you'll want to close, and then if you click "download" again it should download.

Link: http://www50.zippyshare.com/v/oUwvkMH5/file.html

Notes:
I consider the "start date" of my portfolio to be 280116 since that's when I had my portfolio more or less the way I wanted it, so that is why I've used that date with the fund performance chart. I've also removed the 3 funds which I've added more recently.

Anyone can put together a basket of high risk funds that will outperform the FTSE 100 of AFI sector averages in a bull market. You need to look over a whole economic cycle. You are too early in your journey to glean any useful information about the effectiveness of your strategy.

It would also be advisable to start tracking your contributions using a unitisation approach if you aren't already doing so. That will enable you to analyse the effect of your market timing decisions with respect to your cash contributions (look at the difference between internal rate of return (XIRR) and unitised return).

I already did at least once here (and a few more times in random threads on this forum):
https://forums.moneysavingexpert.com/discussion/5595499

Yes, and it's still early days as to whether that call will bear out. If you fancy yourself as a market timer, then it is a good thing to record your calls in a tamper-proof medium like a thread on this forum. Not only do you get to look back with the benefit of hindsight and see if you really did get things mostly right without the selection bias, if you do turn out to be skillful, you'll be able to demonstrate that to others and have boasting rights.

BrockStoker

masonic wrote: »

"Only when the tide goes out do you discover who's been swimming naked."

Indeed, I'm painfully aware of this, and eagerly waiting for the tide to turn so that I can put my portfolio through a suitable stress test.

masonic wrote: »

A very high risk strategy, like the one you have, will tend to outperform by quite some margin during this part of the economic cycle. Holding some cash, as you do, will dampen that slightly, but you'll still do better than someone who is well diversified and therefore holds investments that are better suited to other parts of the cycle. Over a sufficiently long timeframe, you might expect to do very well, and if you can stomach the inevitable massive paper losses a crash would induce in your portfolio, then rebalancing from cash into your worst affected funds will help take the edge off. But, as you say, you are a hostage to fortune and it is still very early days.

Very early days perhaps, but it appears to be working the way it should (so far), so I think I should stick with it. I have at least 10-15 if not 15-20 years (perhaps even longer), and think that should be enough time to give my strategy enough time to prove itself either one way or the other.

I'm trying my best not to be too cocky, but I suspect that I'm less a hostage to fortune than most would assume. The sectors that I tend to go for/overweight are all sectors that are pretty much certain to grow significantly in the future. The need for medicines, energy, and technology for example will only grow.

I realize though, that disruptive technology could come along and introduce a fly into the ointment, so keeping on top of what is going on is mission critical, as is making sure that the fund/s I hold is/are invested in those disruptive technologies.

Whilst the healthcare sector is currently seen as a defensive sector to invest in, I see parallels with specific sub-sectors in sectors like tech and energy in terms of defensiveness, and from what I've been reading, others are cottoning onto this too now.

I've said it before, but the tech sector is changing/growing in a way financial markets have not come across with a sector before. It's showing signs of SELF-sustaining growth, that follows an exponential curve, since solving one tech problem over here solves multiple tech problems over there.

Potential bubbles aside, playing this potential could be very lucrative, and the nice thing is that it's still early days and the full potential has no where near (I'd be happy to bet) been realized by the markets yet - I believe.

One other key point I should make here is I have always been interested in science/technology (Studied Biology at Uni and have even worked as a lab techie for a short stint although I never perused it as a carrier in the end) since I can remember, so perhaps I have a slight advantage in that respect compared to most investors.

More importantly, I'm investing in things I understand and am familiar with at least on some basic level, which I think is important, although any reasonably intelligent person reading this could swat up enough on a particular sector to give them a bit of an edge if they have the inclination to.

So the backbone of tech (mainly) and energy I'm striving for in my portfolio (still got a little more tweaking to do), whist appearing risky at first glance, also has a defensive aspect that is perhaps not so obvious, especially when looked at from a longer term perspective.

I've glossed over many of the details, but I hope that still makes sense.

masonic wrote: »

It would also be advisable to start tracking your contributions using a unitisation approach if you aren't already doing so. That will enable you to analyse the effect of your market timing decisions with respect to your cash contributions (look at the difference between internal rate of return (XIRR) and unitised return).

Thanks for the link. Still digesting some of the info there, but I worked through the unitisation and the result I got from 280116-110417 was 23.1%, which appears to be pretty much on par with what the FTSE 100 has done over the same period.

I think even though the timescale is short, that's fairly encouraging especially if you take into account my portfolio is currently in "a dip" part of it's cycle. If you use the recent high on 060317 then that is another ~3% , or about 2% out-performance of the FTSE 100.

Considering also that the FTSE 100 has been on fire recently, and that biotech has been lackluster in comparison to what it has been (something that I think is likely to change in the short term), taking those factors into account I believe paints an even more encouraging picture.

I've calculated that I need around 12-14% annualised gains to reach my target in 5-10 years, whilst taking income, which I thought might be overly ambitious at the time, but it seems to me to be a realistic prospect at this stage.

Of course, there are a few caveats, most of which I think have been pointed out in this thread, but I think I have a fairly bullet proof plan, even if it takes 15 years to reach my targets, or 20 in an absolutely dire scenario, which would still be acceptable to me, although of course I'd prefer not to have to wait so long.

Dare I say it, but so far we can't rule out the possibility that I reach my target in 3-5 years, but I think this may be a bit overly optimistic!

I guess the main point/potential stumbling block is (as you pointed out) how consistent my timing attempts are.

Of course it'll be a few years before we get a more accurate picture, but I think that is a fair assessment based on current information?

masonic wrote: »

Yes, and it's still early days as to whether that call will bear out. If you fancy yourself as a market timer, then it is a good thing to record your calls in a tamper-proof medium like a thread on this forum. Not only do you get to look back with the benefit of hindsight and see if you really did get things mostly right without the selection bias, if you do turn out to be skillful, you'll be able to demonstrate that to others and have boasting rights.

Thanks for tips/thoughts. I'm not really looking for boasting rights, just a way to get the most out of my investments, and if in the process I can also show that timing can be a good idea if used in a reasonably restrained and thought out manner, then that's fine too.

I'm happy for any constructive feedback if you or anyone spots an obvious flaw in my logic. I do have other assets to fall back on should this portfolio/plan fail, so it's not the end of the world for me by any means if it does, but at the same time I don't want to needlessly throw money away.

AnotherJoe

I wouldn't have said healthcare is defensive, depends which areas of it you are investing i I suppose. Unless you don't categorise funds like BIOG as healthcare but technology ?

I think there's possibly a disparity between what most people think of as market timing and what you are defining it as. If I've read you right you think market timing is thinking that say technology stocks will do better than finance stocks over the long term so you'll invest in technology, and perhaps also that say there is an upcoming issue that means that technology might do badlyor well so you will or won't invest yet (let's say you think Trump will introduce a new tax or something , just an example)

I would not call that market timing. I would define market timing as deciding that technology stocks are where you want to be, but deciding they are "too expensive" right now (without looking at any other external factors that might affect them such as my hypothetical Trump tax) and waiting for that crash so you can buy at the bottom.

I've decided for example that over the next 5 years the U.K. Is not the place to be invested. Same as I've decided biotech is. So I'm out if UK and into biotech. Market timing, to me, would be deciding that biotech was good furvthe long term but I'm not investing yet because it's too expensive and I'll wait, without an particular thought as to events that might make it fall.

FWIW i wouldn't say the ftse100 has been on fire. In that that gives the impression that the whole thing is doing well when in reality maybe a dozen companies have done very well due pretty much to currency fluctuation and nothing else. I think if you took the currency rise out if the ftse100 it would have gone nowhere. Whereas biotech stock has been somewhat mundane but it's performance is much more about the underlying strength of those companies than a false picture due to one off currency changes.

BrockStoker

AnotherJoe wrote: »

I wouldn't have said healthcare is defensive, depends which areas of it you are investing i I suppose. Unless you don't categorise funds like BIOG as healthcare but technology ?

Healthcare is an "umbrella" sector that includes the biotechnology, and pharmaceutical sub-sectors amongst others.

Investopidia on healthcare: http://www.investopedia.com/terms/h/health_care_sector.asp

It is most definitely a defensive sector since, from the above link:

Even during economic downturns, people will still require medical aid and medicine to overcome illness. Having a consistent demand for goods and services makes this sector less sensitive to business cycle fluctuations.

The biotech sub-sector is what it says - biological technology, which is companies that rely on technology to develop treatments and medication to treat illness (mostly). So there is also a defensive element there too, although it seems to be sensitive to a completely different set of issues compared to most other sectors, making it a good diversifier IMO.

Also, since the sector is driven by advances in technology, there is plenty of crossover between biotech and general tech (becoming more and more so), and as I wrote about in my previous post, I think it will see similar growth trends to general tech. Computing power and AI will continue to drive discoveries of new treatments at an ever increasing pace, and unravel long standing mysteries of how we function as biological organisms/why we malfunction.

The new technological revolution we are now entering is bound to alter every aspect of our lives, and in ways we probably can't conceive now. I'm just picking out the obvious trends, but I'm sure other sectors will follow suit to some degree or other.

AnotherJoe wrote: »

I think there's possibly a disparity between what most people think of as market timing and what you are defining it as. If I've read you right you think market timing is thinking that say technology stocks will do better than finance stocks over the long term so you'll invest in technology, and perhaps also that say there is an upcoming issue that means that technology might do badlyor well so you will or won't invest yet (let's say you think Trump will introduce a new tax or something , just an example)

All I'm doing is avoiding buying if I think the outlook for a sector is poor in the short term. BUT, that doesn't mean that the market and I are necessarily in agreement, and if I think a correction has been overdone/the sector has good prospects over the medium-long term then I'll invest.

I also prefer value (compared to growth) funds/stocks, although I'll take growth stocks if they have suffered and are not as expensive as they once were.

Right now I'm looking to invest more in tech, but it has gone up quite a bit, so I'm not prepared to invest till it's come down at least a bit, and I'll put more in if it goes into "crash mode". Rather than missing out if it continues to go up, I look at it like I'm already almost invested, and following my strategy which is to wait till a better opportunity presents itself.

There's always a chance that I might miss the boat with tech I guess, but for the moment I still think the majority of tech investors are not very aware of the changes that are afoot, so there should still be dips when large corrections created in unrelated sectors ripple through the markets, though I think these will start to diminish over time.

I can't say if all this qualifies as timing so I'll leave it for others to decide!

AnotherJoe wrote: »

I would not call that market timing. I would define market timing as deciding that technology stocks are where you want to be, but deciding they are "too expensive" right now (without looking at any other external factors that might affect them such as my hypothetical Trump tax) and waiting for that crash so you can buy at the bottom.

I guess that is what I'm doing, although with the caveat that I do already hold some tech - I just would not mind holding more If the price is right (if that makes a difference?).

AnotherJoe wrote: »

I've decided for example that over the next 5 years the U.K. Is not the place to be invested. Same as I've decided biotech is. So I'm out if UK and into biotech. Market timing, to me, would be deciding that biotech was good furvthe long term but I'm not investing yet because it's too expensive and I'll wait, without an particular thought as to events that might make it fall.

Your call may turn out to be a wise one, but I think the UK stands a very reasonable chance of coming through this turbulent period in better shape than people think, so I'm sticking with it (my other, smaller portfolio, is all UK equity) and likely buying on dips. I do prefer biotech for it's sheer potential for growth though, and can accept that there's a small (but real) possibility that UK PLC could fall flat on it's face.

AnotherJoe wrote: »

FWIW i wouldn't say the ftse100 has been on fire. In that that gives the impression that the whole thing is doing well when in reality maybe a dozen companies have done very well due pretty much to currency fluctuation and nothing else. I think if you took the currency rise out if the ftse100 it would have gone nowhere. Whereas biotech stock has been somewhat mundane but it's performance is much more about the underlying strength of those companies than a false picture due to one off currency changes.

I agree with your points here, and that it's the exchange rates that have boosted the performance of the FTSE 100 (and my portfolio/biotech too), but the point I was making was that (for whatever reason) the FTSE 100 has posted an unusually high gain in the last year or so, yet I still just about managed to outperform it. It may be hinting that my portfolio is performing above average, which is what I'm after, and if I can out-perform it in a year when it's done well then that suggests I can outperform it in most years, but obviously more data/time is needed before we can come to any firm conclusions.

Or to put it another way, If my portfolio can consistently outperform the FTSE 100, then that puts me in the ball park for the sort of annualised return I would need to reach my goals.

jimjames

BrockStoker wrote: »

Your call may turn out to be a wise one, but I think the UK stands a very reasonable chance of coming through this turbulent period in better shape than people think, so I'm sticking with it (my other, smaller portfolio, is all UK equity) and likely buying on dips. I do prefer biotech for it's sheer potential for growth though, and can accept that there's a small (but real) possibility that UK PLC could fall flat on it's face.

I think it's worth considering that the UK stockmarket isn't the same as the UK economy. Whatever you think about how the economy might perform doesn't necessarily translate into UK market performance as nearly 70% of FTSE100 earnings are from outside the UK. Hence the rise last year as a result of the currency dropping against the dollar.