Anyone Acting Defensively?

Secret2ndAccount

Of course unsustainable. I don't expect to see 30% annualised for the next 30 years, but had I remained in STMM I would have gained about 1% in the same time period. That 8% difference is lost forever. Risk is a two-way thing.

Alexland

Secret2ndAccount said:

Of course unsustainable. I don't expect to see 30% annualised for the next 30 years, but had I remained in STMM I would have gained about 1% in the same time period. That 8% difference is lost forever. Risk is a two-way thing.

I agree but the market is very good at teaching us the wrong lessons. 

I don't think it's healthy to think in terms of equities vs STMM/cash - a portfolio including bonds is the answer.

brasso

Alexland said:

I don't think it's healthy to think in terms of equities vs STMM/cash - a portfolio including bonds is the answer.

Are bonds still such a big thing though? I've seen so much in recent times saying that the old inverse relationship between stocks and bonds no longer holds. The rule was always that bonds would rise when equities fell and vice versa. I'm now being told this tendency is no longer such a hard and fast rule.

What does the MSE hive mind say on this? Thanks.

Alexland

brasso said:

Alexland said:

I don't think it's healthy to think in terms of equities vs STMM/cash - a portfolio including bonds is the answer.

Are bonds still such a big thing though? I've seen so much in recent times saying that the old inverse relationship between stocks and bonds no longer holds. The rule was always that bonds would rise when equities fell and vice versa. I'm now being told this tendency is no longer such a hard and fast rule.

The inverse correlation wasn't going to work when bonds were so overvalued. Even low risk assets get high risk when the price is bid too high. Bond holders saw a ramp up in prices followed by a crash. Those that got in while they were overvalued to historic norms suffered.

However the value of bonds is back to reasonable valuations in recent years and far closer to historic norms so it's reasonable to expect that if committing to duration now (especially on inflation linked gilts) you should eventually get an above inflation return likely better than STTM/cash has historically delivered.

As such there is now some real growth opportunity in not holding equities that's better than sitting on your hands with time out of the market holding cash etc which might just keep pace with inflation.

Now I'm not saying there won't be circumstances where both equites and bonds don't concurrently suffer (for example a rise in interest rates usually negatively affects all asset prices) but that's always been the case and nothing new.

I still believe some STMM/cash should be part of the portfolio mix as it can help when rebalancing (or 'over-rebalancing' if you are so inclined to take more risk when opportunities look best) etc.

Cobbler_tone

It can't be the most sensible approach (definitely risk adverse I guess) not to invest in equities whilst they are doing really well, just because there are going to have some bumps in the road. Probably driven by the rolling news stories of an imminent crash 365 days of the year. 

bjorn_toby_wilde

A correction is perhaps overdue but does that have to mean a crash?

grumpsthegit

Looking to retire next year so have moved from:

75% equites, 15% bonds 10% cash to
40% equities 5% bonds 10% cash and 45% gilts

Pretty cautious I know but have locked in a 5.16% yield on the gilts so this gives me a stable core to my portfolio.

 

Roger175

I'm not embarrassed to say that I'm acting very defensively. Starting around this time last year, I've significantly reduced our exposure to US markets from around 40% to around 10%. There are various reason for doing this, partly it has to be said I no longer want to be invested in a country run by the orange buffoon that is Trump, but more importantly, we are both now fully retired and have more than sufficient provision. We have, if you like, won the game. Why would we want to risk loosing a significant amount and then have to win it again? Remember the basic maths, if the markets drop 50%, there needs to be a 100% rise to get back to the starting point.

Overall we are about 55% in equities and about 45% cash (or equivalent). As long as we can keep pace with inflation, then we will never want for anything, so why would we want to have sleepless nights worrying when the next crash comes (and it will come, history and personal experience tells us that).

I think the whole point here is that it all depends on where one is the the investment journey and what risks one feels they need to take given that position. If I was still 20 years out from retirement I would be taking a very different view.

RogerPensionGuy

Alexland said:

SouthCoastBoy said:

Yes, crazy isnt it, unsustainable in my view

There's a generation of investors who haven't experienced a long drawn out crash in equity markets or a sustained period where bonds outperform or the US doesn't outperform. Could lead to a decade of disappointment for some.

It feels great to be diversified right now.

There are other good things to invest in so we can sleep well while achieving our investment objectives.

Then as valuations change then we can rebalance into new opportunities.

Very nice and feels a lot less pressured than when equities were the only thing worth holding.

I feel very like this post. 

15 years on the up and it's happy days. 

These last 15 years we have seen the rise of index investing and retail inputs also.

Even the USA tarrif wolf crys have faded in to the background noise. 

Huge money being passed around between the Megga 7,10 or 20 big guys like buying drinks at the end of long Saturday in the pub. 

Maybe the current sentiment and willingness to fill stock markets with cash will just carry on forever, maybe it won't, time will tell.

Albermarle

bjorn_toby_wilde said:

A correction is perhaps overdue but does that have to mean a crash?

A more modest correction is also entirely possible.