Falling Market Strategies

robp

The traders (both Bonds and Equities) who I used to work with talked about the 9 year cycle. They said that over a 9 year period the markets tend to flip between Bonds or Equities as the favorite investment type.

They could have been lying, but I don't care. They were all richer than me so they must know something!


I imagine that someone investing over the short term needs to have an acceptable get out time or value of funds. A little like a gambler saying 'if I go £100 up, I'll cash out'.

Personally, I'll be sticking with what I have and adding some diversification along the way.

Jonbvn

Aegis wrote: »

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?

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.

Aegis,

Just to qualify my comments. I generally invest in unit trusts/OEIC's rather than individual stocks.

Regarding your first comment of buying a falling stock, there is a very relevant article in the Torygraph today.

Your money and your brain:
Caught in the endless tussle between greed and fear, investors continue to make all the same mistakes they ever have. We know we should buy low and sell high, and yet invariably we do exactly the opposite.

Just ask yourself which is likely to outperform over the next year: high-flying emerging markets or out-of-favour commercial property shares. Now try to imagine yourself selling your India fund, which has risen 40pc since August, and reinvesting the proceeds in British Land shares, down 31pc in the past 12 months. Difficult, isn't it?

egamar

Jonbvn wrote: »

Just ask yourself which is likely to outperform over the next year: high-flying emerging markets or out-of-favour commercial property shares. Now try to imagine yourself selling your India fund, which has risen 40pc since August, and reinvesting the proceeds in British Land shares, down 31pc in the past 12 months. Difficult, isn't it?

Great quote: isn't that the dilemma we all face? And indeed, in my case almost exactly!

Aegis

Jonbvn wrote: »

Aegis,

Just to qualify my comments. I generally invest in unit trusts/OEIC's rather than individual stocks.

Likewise. I should have written "investments" rather than "stocks" when I wrote that.

Regarding your first comment of buying a falling stock, there is a very relevant article in the Torygraph today.

Your money and your brain:
Caught in the endless tussle between greed and fear, investors continue to make all the same mistakes they ever have. We know we should buy low and sell high, and yet invariably we do exactly the opposite.

Just ask yourself which is likely to outperform over the next year: high-flying emerging markets or out-of-favour commercial property shares. Now try to imagine yourself selling your India fund, which has risen 40pc since August, and reinvesting the proceeds in British Land shares, down 31pc in the past 12 months. Difficult, isn't it?

The examples in that second paragraph seem excessive, but rebalancing sort of forces you to do just that! Never really saw it in those terms though...

wombat42_2

egamar wrote: »

Great quote: isn't that the dilemma we all face? And indeed, in my case almost exactly!

Many were saying get the hell out of China/Hong Kong back in March (after stellar gains) and ever since yet since then the stock market has since soared into the stratosphere. It could soar for a longtime yet or it could crash tommorow morning who knows. I pulled out of China/Hong Kong a few weeks back but it was premature and has soared since. I am now half back in and just hope to make some more limited gains before getting out of China for good.

Primrose

Having built up a respectable sum in equity PEPS/ISA's over the years and being of retirement age, but with hopefully plenty of years still ahead, I feel the only option is to hang on in there for the longer term as I don't won't to lose either the potential tax free income, or the capital gains tax-free benefit. And there doesn't seem to be any easy way of holding cash in ISA's. However, having lived through the last stock market crash and the dot.com crash, I also have a reasonable cash sum on deposit. Some would say my proportion of cash is too high, but I'll live with the possibility of losing out on inflation by having the peace of mind that this section of my savings is safe.

munk

egamar wrote: »

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!

How about transferring into Hargreaves Lansdown who do have a cash facility? You'd want to check this but I seem to remember reading in one of their documents that you did have the option to move to a defensive cash position on a s&s ISA for a limited period and then at a later date switch the money back into whatever fund allocation you want - all without losing the tax benefits of the ISA.

I think I read on this forum somewhere that HMRC's guidance regarding temporarily 'switching out' money from s&s ISAs into a cash holding and later switching back into s&s funds is very unclear an open to interpretation by the financial providers. Whether they allow customers the option to do it though is up to them.

Their interest rates on HL's cash 'accounts' aren't amazing - tiered or 'banded' interest rates - although they're not pitiful either (basically between 2-5% iirc). Just an idea anyway.


As to the main question of this thread, I can't comment with any authority since I haven't been in the investment game for very long, but by all accounts I've read the best way to go is to just keep a well diversified portfolio that suits your risk profile and stick to it mechanically so as not to become emotionally attached to your investment. This way you're more likely to benefit from the large rises that often occur immediately after a considerable fall or correction.

Does seem to be counter intuitive at times though - to me at least - for example at the moment moving 'good' money over to 'bad' funds (bad in the sense of funds that are dropping in value presently, see second paragraph below re property funds)... always makes me think of the phrase 'throwing good money after bad' But I suppose it makes sense to 'cream off' the profits made from your best performing funds and reinvest them in those funds that aren't doing so well so you're buying more units/shares for your money.

The pound cost averaging (pca) idea always baffles me slightly as well - pca is supposed to be a strategy to counteract market timing, but surely the act of pca is in itself timing the market? You're gambling on the fact that the holding you're investing in using pca will go down over time - in other words you're making an active decision to time the market downturn by drip feeding in your money.

Even so it's useful at the moment when building up a 10% weighting of property funds since the property market is dropping right now. Similarly to some extent with bonds - whilst base rates are still high and the times are good with the equity markets (especially with the 'santa effect' in the run up to xmas), the bond markets are relatively suppressed (at least compared with the last few years anyway) so it makes sense to drip feed in any money to fill up a bond weighting perhaps (though maybe less so since bonds are less liable to drop in value as quickly as equities).

However this paragraph above again highlights just how pound cost averaging can end up just being a special case of market timing! And what happens if you decide to drip feed money into property say over 6 months (which is my plan at present) but then prices still continue to fall lower? I suppose at least you haven't lost as much as if you'd invested it all in one go... guess that's the point of pca...

Jonbvn

An interesting article I have found regarding the psychology of investing.

http://www.investorhome.com/psych.htm

[Deleted User]

the market is back on its long term uptrend. I have been buying shares during each dip in the last few months, having sold at the peak

OP try not to get into the herd mentality ie by buying high and selling low. Learn about market psychology and a bit of simple charting, then do your own thing

someone mentioned diversification and he/she is absolutely correct. I hold 23 stocks across 14 sectors and the weighting is towards the more defensive sectors. I also hold a balance of gilts and ns&i index-linked certs. It is about balance so that the boat is stable if the waters get rocky

Make sure the risk/reward is what you are comfortable with eg all my stocks are in the blue chips

Browntrout_2

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?

In my opinion we had a correction July/August and the market has made new highs since then, it's been and gone. Corrections are buying opportunities and should not distract you from long term investing.

Bear markets are entirely different, and the last three were 1987, 1990 and 2000, I did not have a strategy in 2000!

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?

Ask them to see a spreadsheet of their all their trades, this is not investing, but speculation a.k.a. gambling and only 10% or less are profitable over the term.

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.

With Hindsight the perfect allocation would be 100% cash. Bear markets last 1 to 2 years and have very sharp V bottom reversal. Buying in either side of that V is very profitable in the long run, i.e. you get in and it drops another 10% and you are fretting that the world is going to end, then it bounces 20% and continues to rise for years.

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!

As long as you tough it out that is fine, however I reckon the average man in the street sells out after losing 40% and then sticks all in cash for ever, or until the next market peak sucks him in again when he's forgotten the pain.

It is 'time in the market' not timing the market that creates wealth in the long run.

BTW - I don't see a bear with all the talk on this board of cash ISA's there is plenty of fear in the market already, wait until the last cash investor takes out a S&S ISA......

PS I liked the fear of losing a $1 story, it comes from our stone age brain and fear of heights.