Vanguard investing options in market downturn

Raymond2016

Hi all,

I have an account for online investing with Vanguard. If I wanted to invest in a fund that would do well in the event of an equity market downturn, would something like the fixed income bonds be appropriate? I was thinking about something like US Government bond index fund? I appreciate markets are unpredictable and bond funds will not rise as well/may drop in an up going market...just wondered on thoughts about these Vanguard fixed income funds?

Audaxer

If you are investing at regular intervals like monthly over the long term, then in a downturn I would continue investing in what I was investing in. If you are investing in fund(s) with equities, you will be buying units in the fund(s) at cheaper prices, so that is a good thing for your long term investment. In a downturn I wouldn't change strategy and put more into fixed income funds - it's better to put more into equity funds to keep your portfolio in it's original equity and bond weightings.

Linton

I am not a serious bond investor but at first sight US Government bonds seems a reasonable possibility. I would prefer them to UK government bonds as US interest rates have room to fall whereas UK rates are already very low. A fall in interest rates results in a rise in bond prices and vice versa. I would not rule out a small amount of gold.



However there is a matter of principle.....


It is not a good idea to make short term changes against the possibility of future events, especially possibilities that get a lot of press coverage. The events may never happen, or may not happen in the short term. Better to design your portfolio from scratch so that it can cope with the variability of the markets to the extent that you require and then dont change it.


If you are investing for the very long term and are continuing to contribute it is probably better to just ride the waves with a high equity, possibly 100%, portfolio. The money used on bonds and similar investments to handle the bad times represents money you arent using to gain from the good times. Good times last for longer than bad ones.

seacaitch

Raymond2016 wrote: »

If I wanted to invest in a fund that would do well in the event of an equity market downturn

What sort of track record do you have in correctly identifying when an equity market downturn is about to commence and then end?


Rhetorical question by me, as your question telegraphs that you're a novice investor and so you will posses no such track record.

Instead, what you're doing is responding to events that have already happened, and in particularly to the mainstream news coverage of those events which encourage an emotional reaction. The effect of this in turn is to encourage you to extrapolate recent events and trends into the future, such that recent bad (good) news is always assumed to become significantly worse (better) for the foreseeable, thus making you feel confident in betting on that outcome.

If you're a novice investor, new to this game, this will almost certainly not work out well for you.

El_Torro

If you're looking to invest defensively then the best thing to do would be to put your money in an actively managed fund which specialises in doing well during downturns. Of course there are a lot of funds that claim they will do well during the next downturn, whether they do or not remains to be seen.


Also, I don't think the Vanguard platform will give you access to such funds.

SonOf

If I wanted to invest in a fund that would do well in the event of an equity market downturn, would something like the fixed income bonds be appropriate?

Vanguard have no funds available in the UK with an objective or potentially beating market returns. They supply index trackers and multi-asset funds with underlying index trackers. You get what the market gives you in either direction.

However, the same can be said for most options. When things go up or down, your investments will generally follow. It is the degree it follows that is where the difference is and you do have some controls on that.

poppy10_2

El_Torro wrote: »

If you're looking to invest defensively then the best thing to do would be to put your money in an actively managed fund which specialises in doing well during downturns.

Very bad advice. Actively managed funds generally do just as badly in downturns as they do in bull markets

Alexland

Although I wouldn't suggest you forward guess the markets this is where a 2 fund portfolio of equities and bonds can be more convenient than a mixed asset fund.

On Vanguard Investor perhaps a suitable proportion of the Vanguard All Cap and Global Bond Index Hedged fund to meet your long term objectives?

If markets decline you can gradually sell down some bond units (which might have increased in value, or at least not declined as much) and buy more cheaper equity units. Then ride the recovery for however long it takes before rebalancing to your normal target allocation.

This caps your upside in positive market conditions but enables you to make gains from negative market periods. Still it takes balls to catch a falling knife and you risk buying into a nasty crash. Still you did ask for options.

Alex

eskbanker

Alexland wrote: »

it takes balls to catch a falling knife

Thanks for the image!

* crosses legs *

Ciprico

These show:
100% World Equity tracker
v.
80% bonds 20% Equity tracker

Note the dip at the end (or lack thereof) caused by "blip" we are now experiencing...

You don't need to be too sophisticated to reduce risk if you fear down turn

seacaitch

123mat123 wrote: »

You don't need to be too sophisticated to reduce risk if you fear down turn

Presumably, they switch back to risk assets when they feel "safe" again and optimistic about the future?


For the vast majority of investors who lack unusual insight into the future direction of markets, managing a portfolio along the above lines could well be the ideal recipe for a buy high sell low strategy and as such is likely to be highly detrimental to long term returns. So not recommended!


1. Most long term investors, when feeling fearful, are best off doing absolutely nothing different to what they usually do: just carry on following their usual plan which they drew up when they were feeling calm and rational. Ignore the mood and the noise.

2. Some investors, likely to be a more experienced cohort, may identify any feelings of fear they themselves feel as an indication that many other investors are likely to be feeling similarly fearful if not more so, while recognising that asset prices will already have adjusted for this raised fear - or indeed over-adjusted due to investor overreaction, which is commonplace during very rapid price movements as heuristic biases come to the fore and impeding rational decision making. As a result, this more experienced cohort of investors may like to lean against a perceived market overreaction somewhat and begin trimming safer assets and adding trisk assets, at the margins. Still following their plan, but a plan which allows for modest contrarian portfolio tilts.

3. A slimmer-still cohort of investors, possibly those mentally wired a bit differently to "the norm", due either to extensive market experience/exposure and desensitization, or perhaps just to nature, may well not even feel the "fear" or other market-induced emotions that their fellow investors feel. This slimmer cohort can thus be hyper rational and pick their buying and selling points unimpeded by the emotions that can hamper many other market participants. They may be active investors or traders, and if risk management is effective, may be capable of generating returns significantly in excess of and/or uncorrelated with the market return.


I think most people with jobs to go to and lives to live, for whom investment is simply a tool to secure their financial security for a later stage of life, are probably best served by behaving and investing as cohort 1.

If investing becomes more than that, a hobby or vocation, then as experience is gained they may find themselves in cohort 2. This may or may not lead to moderately better returns, and if it doesn't they'd be better to returning to cohort 1.

We see a few people on investment forums starting off and jumping in and behaving as if they're in cohort 3, but normally fairly quickly they come unstuck, often badly, and either lose a lot of money or otherwise achieve poor returns, possibly putting them off investing again for a very long time.