FTSE100 Futures indicating an open below 7000...

jamei305

Hopefully it doesn't recover until the second week in April :beer:

bowlhead99

username12345678 wrote: »

The average bear market (US) is a touch over 30%, but of course we (UK) had 2 inside a decade that nudged 50%.

If you define a bear market as a drawdown from the peak of anything over 20%, then using the US S&P for easier access to the numbers, going back to the mid 1920s the US S&P has been in a bear market for almost a quarter of the time. Pretty much half the time it is more than 5% off its peak (cutting the data on monthly total return, rather than looking at every single intra-day value).

So, being 10% below a peak shouldn't be any sort of a surprise or worth writing home about. Yes the FTSE has gone down 200pts in the last 9 calendar days (7214 to 7014) but in the one week previously it had gone up 155pts (7069 to 7224) so you can't really talk about sustained downward trend at the weekly level. Zooming out for wider periods we are 23% up from Feb 2016, excluding dividends (so, closer to 30% really on total return). The 'downward trend' is only really observed by cherry-picking the dates to get the worst-sounding results.

As an aside, the comments on the US having an average bear market of 30% and UK having a couple of near 50percenters recently, might imply the UK is more volatile. Actually the total return drawdown in the last one did touch 50% for the S&P500 in dollars, while the drop in FTSE100 in pounds was 'only' a little less than a 45% drop. (44.8% FTSE100, 45.6% All Share). In context FTSE Developed was 57.4% (dollars) and FTSE Emerging 64.5% (dollars).

So, if you have a plan to start switching cash or lower-risk assets to equities at -20, -25, -30, etc, down to 40% you might find yourself wishing you'd had the reserves to keep at it for a longer time if your global equities go on to lose 60% at the bottom of the trough

jamei305 wrote: »

Hopefully it doesn't recover until the second week in April :beer:

Don't let the tax tail wag the dog

Malthusian

dividendhero wrote: »

Yet more justification why you should invest globally and not concentrate on a small island beset by political and economic problems

Indeed, spread your money around lots of small islands and large continents beset by political and economic problems instead.

Bravepants

The FTSE100 may be down 10%, but my S&S ISA is down only 3% or so. Can you guess why?

username12345678

AnotherJoe wrote: »

Just to add to your post BH, its not even "the market" its the FTSE100, its unclear if the OP is actually investing in the index or just using it as a wider bellweather*, in either case as you've outlined, a poor idea.

* of what though?
The UK? Use the 250.
The world economy - are you crazy?

Personally i'm holding around 18% of my equity portion in the UK. The remainder is geographically allocated with a passing nod to relative market sizing.

I'm a little surprised that rebalancing is a controversial subject in itself. I can sort of see why a concious decision to move from annual rebalancing to a market driven one may be considered slightly unorthodox but with the speed (and relative short duration) of downturns I am comfortable with that as an option. The FTSE100 won't be 'the' trigger, but rather one of them.

bowlhead99 wrote: »

So, being 10% below a peak shouldn't be any sort of a surprise or worth writing home about. The 'downward trend' is only really observed by cherry-picking the dates to get the worst-sounding results.

So, if you have a plan to start switching cash or lower-risk assets to equities at -20, -25, -30, etc, down to 40% you might find yourself wishing you'd had the reserves to keep at it for a longer time if your global equities go on to lose 60% at the bottom of the trough
Don't let the tax tail wag the dog

There was a caveat in the opening post about the falls this year being nothing unusual in a historical context, it was a discussion starter.

My non-equity portion is spread between bonds (gov/corp), abs rtn and cash funds and is there primarily as a dampener because crunching the historical numbers gave me a feel for what i'd be happy with emotionally accepting in a market downturn whilst providing the opportunity for a return that would historically keep me ahead of inflation + a bit.

It isn't there as an immovable object though as inflation will ravage it over the next 40 years (hopefully) just as the worst bear market would. So in a sideways trending market(s) i'll be rebalancing annually but where the market movement is quick and deep (as bear markets often are) then i'll look to rebalance as those falls dictate. I may do it too soon or do it too late...who knows?

bowlhead99

username12345678 wrote: »

I'm a little surprised that rebalancing is a controversial subject in itself.

It isn't really, lots of people do it. That's why I suggested your opening post about the sky falling in, which you followed up by saying actually it was fine as if it drops enough you'll just rebalance and if it doesn't drop enough you won't need to rebalance... seemed a bit mundane a topic to be starting a thread on. The precis of the two posts is basically, "Market seems to be going down a bit, but I am fine if the market goes down, or doesn't go down.". Well, same here.

Still, there is quite a difference in mindset between being disappointed your portfolio is out of whack because it has lost money and now you have to reallocate funds and rebalance to avoid being overweight in your bonds and cash and abs return funds etc... and being giddy with excitement that your portfolio will lose enough that you can sell down some bonds and cash and ar funds and buy equities.

You mention the bonds, cash, AR funds are there as a 'dampener' to take the edge off equity volatility. But seems like you are thinking of them as a 'performance enhancer' as you are half waiting for a crash so you can use them to buy more stocks. If what you really want is stocks, buy them. If what you're saying is you want stocks but you want them 20-40% cheaper so you are waiting for some magical 'trigger point' - then that sounds like, as economic alludes in his first reply, you are focussed more on trading or market timing than on the 'savings and investment' which was originally the focus of this board.

Of course there are a whole variety of other posts in the recent past where economic has said he is doing [whatever] with his investment monies because of feeling that certain markets are a bit high or whatnot. It's hard not to have an opinion on other people's opinions.

username12345678

bowlhead99 wrote: »

Still, there is quite a difference in mindset between being disappointed your portfolio is out of whack because it has lost money and now you have to reallocate funds and rebalance to avoid being overweight in your bonds and cash and abs return funds etc... and being giddy with excitement that your portfolio will lose enough that you can sell down some bonds and cash and ar funds and buy equities.

Anybody who gets giddy with excitement at the prospect of rebalancing their portfolio is probably not the type you'd rush down to the pub to have a pint with,

You mention the bonds, cash, AR funds are there as a 'dampener' to take the edge off equity volatility. But seems like you are thinking of them as a 'performance enhancer' as you are half waiting for a crash so you can use them to buy more stocks. If what you really want is stocks, buy them. If what you're saying is you want stocks but you want them 20-40% cheaper so you are waiting for some magical 'trigger point' - then that sounds like, as economic alludes in his first reply, you are focussed more on trading or market timing than on the 'savings and investment' which was originally the focus of this board.

The primary job of the bonds/cash/AR is to put my portfolio somewhere roughly where i'm happy with its risk (you'll be amazed with that revelation i'm sure). Their job certainly isn't (in my mind) as a performance enhancer unless, of course, you consider their contribution in the context of rebalancing opportunities.

It does seem the timing of the rebalancing is what has exercised a couple of posters in as much that a rigid calendar rebalance is fine whilst a market performance driven one isn't. Tbf I can see and argument that rebalancing becomes market timing if you use the latter.

Although could you turn the argument back round and say you are rebalancing on pre-determined performance bands within your own portfolio?


Of course there are a whole variety of other posts in the recent past where economic has said he is doing [whatever] with his investment monies because of feeling that certain markets are a bit high or whatnot. It's hard not to have an opinion on other people's opinions.

It's always good to have your ideas challenged.

bowlhead99

username12345678 wrote: »

It does seem the timing of the rebalancing is what has exercised a couple of posters in as much that a rigid calendar rebalance is fine whilst a market performance driven one isn't. Tbf I can see and argument that rebalancing becomes market timing if you use the latter.

Although could you turn the argument back round and say you are rebalancing on pre-determined performance bands within your own portfolio?

It doesn't matter how often you do it. The goal is to have a pre-determined asset allocation that meets your risk / volatility/ whatever targets.

"rebalancing on pre-determined performance bands within your own portfolio" seems an odd way to put it. The goal is to make sure you have a sensible ratio of everything. If one area has relative outperformance compared to another [e.g. equities down 10%, absolute return funds up 5%] then you no longer have the asset mix you decided was right for you.

For some levels that won't matter so much: If your equities were 40% and your AR funds were 10% and bonds were 50%, and equity markets fall 10% while ARs deliver +5% and bonds stay the same, your portfolio valued at £100 is now worth £96.50 and your equities are 36/96.5ths (37%) with the ARs at 10.5/96.5ths (nearly 11%) and bonds 50/96.5ths (about 52%). It's quite reasonable to decide that's fine as 37:11:52 is not much different from 40:10:50.

Whereas if the mix was 33:17:50 you might decide that two of those asset classes need 'fixing', being quite far off the intention. No need to wait for an 'annual review' to fix it if you find a fault like that. Still, I wouldn't call them 'performance bands'. I'm not trying to fix the performance, which is out of my hands. I'm trying to fix the asset value weighting, which is totally within my hands.

If my equities are x percent or y percentage points above or below the level I'm comfortable at, I would change them, unless it was all within expectation and tolerance in which case I could leave it alone for later. The change is to buy more equities because you don't have enough of them, or to sell bonds because you have too many of them. It's about how much of each you have, relative to your target allocation.

As such, it is all about relative weights to produce the portfolio asset allocation with which you'd be happy; you can't really have an absolute performance target (other than as a byproduct of other relative performance targets) and refer to them as 'performance bands' because if you say equities are down 20% that doesn't mean they are underweight, because your bonds and abs return funds might also be down 20%. So a drop of a certain percentage shouldn't mean you would automatically buy more on the rebalance process, unless you are trying to indulge in market timing and catch something when it is 'cheap'. And cheap may be a misnomer if everything else is equally cheap.

username12345678

bowlhead99 wrote: »

It doesn't matter how often you do it. The goal is to have a pre-determined asset allocation that meets your risk / volatility/ whatever targets.

There is research that points to certain frequency of rebalancing giving better outcomes.

"rebalancing on pre-determined performance bands within your own portfolio" seems an odd way to put it. The goal is to make sure you have a sensible ratio of everything. If one area has relative outperformance compared to another [e.g. equities down 10%, absolute return funds up 5%] then you no longer have the asset mix you decided was right for you.

Agreed.

For some levels that won't matter so much: If your equities were 40% and your AR funds were 10% and bonds were 50%, and equity markets fall 10% while ARs deliver +5% and bonds stay the same, your portfolio valued at £100 is now worth £96.50 and your equities are 36/96.5ths (37%) with the ARs at 10.5/96.5ths (nearly 11%) and bonds 50/96.5ths (about 52%). It's quite reasonable to decide that's fine as 37:11:52 is not much different from 40:10:50.

Agreed.

Whereas if the mix was 33:17:50 you might decide that two of those asset classes need 'fixing', being quite far off the intention. No need to wait for an 'annual review' to fix it if you find a fault like that. Still, I wouldn't call them 'performance bands'. I'm not trying to fix the performance, which is out of my hands. I'm trying to fix the asset value weighting, which is totally within my hands.

Lets call them 'weighting bands'.

And I agree that waiting for a fixed annual rebalancing of weighting could be less than optimal if the market is in a particularly volatile phase and consequently tipping your allocation balance markedly out of kilter.

If my equities are x percent or y percentage points above or below the level I'm comfortable at, I would change them, unless it was all within expectation and tolerance in which case I could leave it alone for later. The change is to buy more equities because you don't have enough of them, or to sell bonds because you have too many of them. It's about how much of each you have, relative to your target allocation.

Agreed.

As such, it is all about relative weights to produce the portfolio asset allocation with which you'd be happy; you can't really have an absolute performance target (other than as a byproduct of other relative performance targets) and refer to them as 'performance bands' because if you say equities are down 20% that doesn't mean they are underweight, because your bonds and abs return funds might also be down 20%. So a drop of a certain percentage shouldn't mean you would automatically buy more on the rebalance process, unless you are trying to indulge in market timing and catch something when it is 'cheap'. And cheap may be a misnomer if everything else is equally cheap.

Agreed.



I suspect my terminology rather than the underlying rationale being at issue here.

bowlhead99

username12345678 wrote: »

There is research that points to certain frequency of rebalancing giving better outcomes

Well, the research can say that for the given set of historic data it tested, it would have been better to have rebalanced monthly or semiannually or biennially or on the second Thursday of every month that had an "r" in its name. It can't reliably indicate what will be best to do next in the next set of market conditions.

The research on frequency also doesn't reliably tell you whether "six months" or "the date at which a portfolio constituent has charged its portfolio share by 20%" will be the best rule of thumb.

What you can say is that rebalancing allows you to add lower-performing uncorrelated assets info a portfolio without impairing performance by the amount you might expect to lose as a consequence of diverting some of the portfolio into that lower long term performer.

So really it's more about spreading risk without losing performance, rather than adding outright gains to performance, if that makes sense...

As such, it's about what you hold at all times rather than how much you make or lose before making a change. Which divorces the concept from being one where you are waiting for an asset class measuring stick (e.g. absolute value of FTSE 100 or FTSE100 TR) to gain or lose an absolute x% or £y before taking planned action.

If you automate the process to take the actions out of your hands and into a word document, so you are definitively going to take X action when the price drops y% from its peak, you are indulging in market timing or momentum /contrarian investing; playing with stop losses or stop purchases etc; and _not_ doing that as a rebalance process. Your word doc says sell bonds/abs return funds to buy more shares when shares are 20% below peak. As bonds/abs funds might also be 20% down, but the decision to sell them to buy shares is out of your hands, you can't really say the substance is rebalancing. Rather, it's a type of trading strategy as economic opined in post #2

I suspect terminology rather than the underlying rationale being at issues here.

In some areas yes. Not trying to be difficult but we do differ on some bits.