US Correction

DairyQueen

An 'ouch!' from across the pond this month.
https://www.cnbc.com/2018/12/21/us-stocks-set-for-lower-week-after-fed-decision-government-shutdown-fears.html

My portfolio is due its annual rebalance. I have been underweight USA this year, and I am not one of those who attempt to time markets. So, should I rebalance back to this year's starting position on the USA? (remaining relatively underweight) or increase my US weighting now? or just delay rebalancing for a month or so.

Thoughts folks?

Alexland

This correction is not unique to the US and has occurred in many global markets. Still it's nice to know is the UK isn't the only country setting our own house on fire with internal politics.

We had some debate yesterday on if this correction provides buying tactical opportunities in the Santa Rally / Rout thread.

https://forums.moneysavingexpert.com/discussion/5939820/no-santa-rally

Alex

Zola.

They will hopefully surge again at the first good bit of news. Having Trump in that role appears to be incredibly damaging for the stock market as well as a million other things.

DairyQueen

Zola. wrote: »

They will hopefully surge again at the first good bit of news. Having Trump in that role appears to be incredibly damaging for the stock market as well as a million other things.

Like Trump's impeachment?

Until recently, Trump has been remarkably good for the US market (courtesy of favourable tax cuts to business). Despite the correction, the US market is still overvalued relative to its historic PE. Is it 'different this time'? I suspect not.

Thrugelmir

Stick with your own investment philosophy. Or switch your investments onto a managed basis.

Why has a fall in prices (in certain stocks) suddenly made US equities more attractive. Other than rebalance on annual basis.

kidmugsy

DairyQueen wrote: »

I am not one of those who attempt to time markets.

I argue that anyone who uses rebalancing is timing the market. True they're doing it in a particular mechanical and rather mild way, but it has the same effect as someone saying "ooh, equities have looked high for a few years now, I'll sell some and buy gilts".

Maybe rebalancing is the best way to time markets. Maybe using the 200 day moving average is. Maybe using CAPE or q is. Maybe using various indicators and discussions in the press and on the internet will eventually persuade you to say "this madness cannot continue; I am selling".

People who are in the early stages of accumulating capital might do best to ignore all of these and just keep investing every month; people who have lots of capital and are within hailing distance of retirement might be fools not to pay attention.

One common argument that I suspect is false is this one: "the old advice to swap to a higher percentage of risk-mitigating investments (bonds/cash) and smaller percentage of return-seeking investments (equities) as retirement approaches is obsolete because I won't be buying an annuity".

It's false because people who don't buy an annuity will typically be self-annuitising, by running equity investments and applying what they suppose to be a safe withdrawal rate. But the sensible among them will keep a large part of their capital as cash, as protection against sequence-of-returns risk. This boils down to pretty much approximating the old advice.

There presumably comes an age when selling your investments and buying an annuity might work out well. Now that would be a big timing decision!

Prism

kidmugsy wrote: »

One common argument that I suspect is false is this one: "the old advice to swap to a higher percentage of risk-mitigating investments (bonds/cash) and smaller percentage of return-seeking investments (equities) as retirement approaches is obsolete because I won't be buying an annuity".

It's false because people who don't buy an annuity will typically be self-annuitising, by running equity investments and applying what they suppose to be a safe withdrawal rate. But the sensible among them will keep a large part of their capital as cash, as protection against sequence-of-returns risk. This boils down to pretty much approximating the old advice.

Agreed, thats exaclty what I will be doing. I am currently near 100% equities but there is no way I will risk that when I retire so likely move to something approximating 20%-30% cash/safe bonds (or 5ish years is another way of looking at it)

DairyQueen

kidmugsy wrote: »

One common argument that I suspect is false is this one: "the old advice to swap to a higher percentage of risk-mitigating investments (bonds/cash) and smaller percentage of return-seeking investments (equities) as retirement approaches is obsolete because I won't be buying an annuity".

It's false because people who don't buy an annuity will typically be self-annuitising, by running equity investments and applying what they suppose to be a safe withdrawal rate. But the sensible among them will keep a large part of their capital as cash, as protection against sequence-of-returns risk. This boils down to pretty much approximating the old advice.
!

My strategy splits the portfolio across three retirement timescales and I allocate higher percentages to equities for the chunk allocated to the later stages of retirement. Problem is that, over a potential 30+ years of retirement it would be inefficient to ignore the potential growth of equities. I am 100% invested in equities in the chunk of the portfolio destined to provide the core drawdown in retirement years 20+ (if I live that long).

Rebalancing is specific to the part of the fund which will be drawdown within the next 3/8 years. I'm not sure whether to rebalance back to the US allocation I held at the beginning of this year or whether to use the correction to allocate more of the portfolio to US equities (at the expense of other regions).

Right now my gut says don't increase allocation to the US but, for example, buy more China. However, that may simply be an emotional reaction (negative) to Trump .

Linton

kidmugsy wrote: »

I argue that anyone who uses rebalancing is timing the market. True they're doing it in a particular mechanical and rather mild way, but it has the same effect as someone saying "ooh, equities have looked high for a few years now, I'll sell some and buy gilts".

Maybe rebalancing is the best way to time markets. Maybe using the 200 day moving average is. Maybe using CAPE or q is. Maybe using various indicators and discussions in the press and on the internet will eventually persuade you to say "this madness cannot continue; I am selling".

The “Timing the market” that is of dubious value involves a prediction of short/medium term prices in the future. That is why on balance it does not work as, unlike safe bond prices, share prices are inherently unpredictable. The current price is the best short/medium term prediction the combined wisdom of the worlds investors can come up with.

For long term investors short/medium term movements are irrelevant. I believe that the best approach here is to set an allocation and keep to it. This is partly for psychological reasons as it stops you trying to time the market. Rebalancing at a predefined time, say once a year, is a natural consequence of this approach as having defined your allocation it is logical to keep to it despite medium term changes in market prices.

People who are in the early stages of accumulating capital might do best to ignore all of these and just keep investing every month; people who have lots of capital and are within hailing distance of retirement might be fools not to pay attention.

Retirement represents a step change in your financial situation and your objectives. So of course you almost certainly need a very different investment allocation at that time.

One common argument that I suspect is false is this one: "the old advice to swap to a higher percentage of risk-mitigating investments (bonds/cash) and smaller percentage of return-seeking investments (equities) as retirement approaches is obsolete because I won't be buying an annuity".

It's false because people who don't buy an annuity will typically be self-annuitising, by running equity investments and applying what they suppose to be a safe withdrawal rate. But the sensible among them will keep a large part of their capital as cash, as protection against sequence-of-returns risk. This boils down to pretty much approximating the old advice.

But you still need a high equity allocation at least as protection against inflation. In retirement your objectives become more complex than previously so you need to assign you asset allocations with much more care. It is not simply a balance between the risk of equity and the relative safety but lower performance of bonds.

There presumably comes an age when selling your investments and buying an annuity might work out well. Now that would be a big timing decision!

Yes, taking an annuity at some point would presumably be an objective determining your allocation at retirement or one that is added later. It is a timing decision, but one of timing events in your life, not timing the market. No one is saying that you should not have life plans.

Linton

DairyQueen wrote: »

My strategy splits the portfolio across three retirement timescales and I allocate higher percentages to equities for the chunk allocated to the later stages of retirement. Problem is that, over a potential 30+ years of retirement it would be inefficient to ignore the potential growth of equities. I am 100% invested in equities in the chunk of the portfolio destined to provide the core drawdown in retirement years 20+ (if I live that long).

My approach is very similar but I add a further split to provide ongoing income.

Rebalancing is specific to the part of the fund which will be drawdown within the next 3/8 years. I'm not sure whether to rebalance back to the US allocation I held at the beginning of this year or whether to use the correction to allocate more of the portfolio to US equities (at the expense of other regions).

Also you need to rebalance between the separate tranches either because their size has changed or because of change in objectives as you get older.

Right now my gut says don't increase allocation to the US but, for example, buy more China. However, that may simply be an emotional reaction (negative) to Trump .

I only have a major rebalance at a fixed point once a year to control my gut instincts. Doing this partly avoids over-reacting to what turn out to be short term movements.

dividendhero

DairyQueen wrote: »

Like Trump's impeachment?

Until recently, Trump has been remarkably good for the US market .

Trumpski's been borrowing money like it's going out of fashion, the US federal deficit is ballooning. Unlike with his dodgy business ventures he can't walk away from these debts simply by declaring himself both bankrupt and incredibly smart