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.