Falling Market Strategies

Aegis

Since there is some speculation at the moment that we're due to see a huge correction some time soon, I wondered if anyone wanted to share any strategies that they've used previously when corrections are on the horizon, or when faced with a bear market. Did they work, or will you be looking into something else entirely?

I've seen a number of people who have sung the praises of day trading during a bear market. I have neither the time nor the inclination (nor, for that matter, the funds) to try this, but has anyone enjoyed success at this in the past?

Others have suggested switching to a more defensive allocation, moving funds from the equity markets into fixed interest investments such as bonds and gilts.

Still others suggest that doing so will mean that when the inevitable recovery occurs, you will miss out on some of the early cost hikes due to the start of a buying frenzy.

So it's a fair question, I'll announce now that my personal strategy will remain unaltered. I'll stick to my guns and wait for the cost to recover itself. because I'm investing for the long term, short term slides don't really trouble me too much, and I'm convinced that in the long term all of my investments will still make more than my money would in a bank account!

Any thoughts?

egamar

Wait. I have plenty of time, and what goes around comes around.

I do plan to take £14/£15.2/whatever out of my ISAs in about March 2008 by selling part or all of my top performers, sticking into Northern Rock (or whatever) and then putting that back in before March 2009. (We no longer have the income to support investment in ISAs from income). This is about 10% of out ISAs

But that's about it: I don't have the depth of understanding nor speed of response to be able to protect myself going down or make significant benefits going up.

From what I read elsewhere (and quiote possibly misunderstood) fixed interest investments such as bonds and gilts respond more to interest rates. And if they don't they'll have gone up before I realize I should have been there (as everyone else has piled in) and gone down before I get out (as everyone else saw the recovery coming)!

The private investor apparently almost always does exactly the opposite (or at the opposite time of the cycle) of the professional, which is how the pro's make their money I guess!

wombat42_2

The proposition that we are about to have a market crash looks like rubbish to me. The market has been rising very nicely for the last week. There are a number of factors that influence the stock market. Right now the prospect of lower interest rates seems to be buoying the market.

egamar

Maybe. maybe not. That's not the point. The point is to have spent time thinking about your strategy before it happens, if it does. When it happens, you haven't got the time to ponder and ask advice for a couple of weeks .....

Methinks Aegis is very sensible to be raising these issues now, and he did not - as you can see - suggest we are about to have a correction (not crash). He said there is speculation thereon. Don't set the hares running just yet!

fimonkey

There may or may not be a crash/correction but for bystanders like me (who know nothing about investment but lurk in the hope they'll learn something), reading threads like this is useful info. I'd appreciate answers that stick to the topic thread as opposed to discussing what the market will/will not do (isn't the answer to that "that no-one knows and everyone has an opinion" anyway)?

May I ask a very basic question please?

Egamar, If you take money out of your ISA (I presume you mean 14K as oposed to £14) ;-) how can you then put that back in (I thought the limit was 7K per year) and will you get a better return on the 14K you take out? (Which'll be better than 6.41% currently at the top of the best buy tables with ICIC bank)?

wombat42_2

If you have a long term perspective (10 years plus) you might expect to get turbulence along the way. If there was a serious correction or crash - history show that the market usually recovers strongly in time and selling is the biggest mistake you can make.

If you are investing for the short term and getting nervous maybe just take some profits out and move it into cash.

egamar

@fimonkey

Yes: £14k or whatever 2x the ISA limit in 08/09 will be.

I'll be putting the money back into NEW ISAs for 08/09 - who knows in what funds, by then though.

What this does is protect some of the stonking gains I've made over the last years (first ISAs bought in March 03). Sure all I'll get is 6.x% less a bit of tax (I have a very low income and live off the wife!) but this might be better than a 50% loss if some of my successful but risky picks go down the tubes!

If I really get nervous I might even cash-out 4x the allowance, and keep 2x until April 2010! Wow, now THAT's planning - I've amazed myself!

Aegis

egamar wrote: »

@fimonkey

Yes: £14k or whatever 2x the ISA limit in 08/09 will be.

I'll be putting the money back into NEW ISAs for 08/09 - who knows in what funds, by then though.

What this does is protect some of the stonking gains I've made over the last years (first ISAs bought in March 03). Sure all I'll get is 6.x% less a bit of tax (I have a very low income and live off the wife!) but this might be better than a 50% loss if some of my successful but risky picks go down the tubes!

If I really get nervous I might even cash-out 4x the allowance, and keep 2x until April 2010! Wow, now THAT's planning - I've amazed myself!

Would you consider switching some of your funds into cash within your ISA? The rates often aren't fantastic, but it maintains the tax-free status which could prove much more valuable in the long run. If I remember my ISA rules correctly, you can often keep cash in a S&S ISA as long as you have the intention of investing at some point.

The other option, of course, would be to buy bonds or gilts and shove them in your ISA. However, there are obvious donwsides: at the start of a falling market gilt and bond prices are probably going to inflate due to demand, while at the end they will likely decrease in value, losing you capital in the long run.

Are there any other investments that could be switched to within a stocks and shares ISA to avoid losing the tax-free status but also to reduce the effect of a falling market?


To everyone else participating: thanks for the opinions. Obviously I'm not claiming that a correction is going to happen at some point soon, but markets to tend to fall for a prolonged period every now and then, so this seems to be an interesting topic to discuss during such a great time for stocks in general. If I knew the date of any coming corrections, I'd sell all my funds and go for a CFD on a few key stocks, thus making my fortune overnight

Jonbvn

Aegis,

I think that as a private investor the major things you can do are as follows:

1. Ensure you have a well diversified portfolio.
2. Invest for the longer term and do not alter your strategy due to peaks and troughs in the market.
3. Do not pretend that you can time the market - I read recently that over the last few years, if you had been out of the market for just 40 days, then you would have missed a lot of gains. Can't remember the exact numbers - and no time to check them out now.
4. Avoid band wagons such as 2k tech stocks.

egamar

Aegis wrote: »

Would you consider switching some of your funds into cash within your ISA? The rates often aren't fantastic, but it maintains the tax-free status which could prove much more valuable in the long run. If I remember my ISA rules correctly, you can often keep cash in a S&S ISA as long as you have the intention of investing at some point.

I'd love to. I can't. My ISAs are with Fidelity/FundNetwork and there isn't a pure cash fund: well, there is, but it can't be used in the way you suggest and I wanted! I checked - so did someone else in another thread here or hereabouts.

It's OK for me though, as we don't have fresh money to invest in ISAs as we're now a one income family, so our allowances are currently - and for the foreseeable future - going unused.

Aegis

Jonbvn wrote: »

Aegis,

I think that as a private investor the major things you can do are as follows:

1. Ensure you have a well diversified portfolio.

Great advice for bulls and bears alike, I'd say!

2. Invest for the longer term and do not alter your strategy due to peaks and troughs in the market.

This seems to hint at pound cost averaging too. Would you continue to invest in a downwards stock in hope of greater payout when it recovers?

3. Do not pretend that you can time the market - I read recently that over the last few years, if you had been out of the market for just 40 days, then you would have missed a lot of gains. Can't remember the exact numbers - and no time to check them out now.

I read the same thing here, but with the 15 best days knocking off over a third of the gains or something. Quite a telling statistic, and certainly a great reason to try riding out market turmoil rather than doing the instinctive bail-out at the first sign of danger.

4. Avoid band wagons such as 2k tech stocks.

This meshes nicely with your first point of diversification.

However, I'd like to add my own expansion to the two and mention rebalancing. If you rebalance your portfolio regularly, you can take advantage of a small percentage of fantastic growth (i.e. if you've diversified properly and have, say, 5% in a very fast rising stock) and you can lock in those gains by ridistributing them across the rest of your portfolio. Someone following this strategy before the dotcom bubble burst would probably have found themselves a lot better off at the end of play, though on the rise they would probably have been laughed at for moving money OUT of the bubbling stocks.