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US Markets Risk
Comments
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Thinking about the portfolio changes I've made since April 2025:
I sold 50% of M&G Japan (took profit) and used the proceeds to buy Polar Value Japan, that was selling Japan large caps to buy Japan small caps, a strategic move.
I sold my entire US holding in L&G US Index (took profit) and used the proceeds to buy HSBC FTSE AW. That also was a strategic move, designed to dilute my US holdings.
I then sold down (took profit) three funds to reduce my overall exposure to equities, because I'd reached my profit target for the financial year and wanted to hold a lower risk position.
I sold a short term bond fund and used the proceeds to buy a short and intermediate term bond fund, yet another strategic play.
None of my transactions over the opast year have been the result of poor performance, they were all designed to improve my positioning and allocation.
I don't think any of those transactions fall into the chop and change camp and none were the result of poor performance.
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They do seem to fall under 'chop and change' given the number of unrelated strategy changes of direction. People are usually trying to improve their positioning/allocation when they move things, but it's precisely that sort of thing which, in the whole (so not necessarily in an individual's case) result in lower return.
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A material change made after holding a particular set of funds for 5-10 years seems fair enough if you have good reason. But if you then want to make another such change within a year or two, then alarm bells should be ringing. People talk about "analysis paralysis", but overanalysing can also lead to reacting impulsively.
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We disagree. I made a concious decison to reduce risk by selling the US Index and diluting my US holdings. I then sold down and took profit and reduced my equities holdings overall. Japan was a diversification move, again, spreading and reducing risk. The whole pattern had changed since April 2025, I continue to believe those were sensible risk reduction moves, in light of US Tech sector concentration. The change from short to internediate bonds derived from the bond market had laterially stabilised hence the argument in favour of intermediates was much stronger.
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With the average holding period at 3.7 years, I suggest your 5-10 years is out of lock step with todays reality.
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It's entirely consistent with the observation that many investors underperform their investments by meddling with their portfolios too frequently. I'd suggest average holding period is a good metric to identify lack of discipline, which I accept, sadly, is common.
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The oldest holdings in the family portfolio have been held since 2006 / 7, and there are several that have been held over 10 years. The geographic allocation (~25%US, 25%UK, 25% Europe and 25% Asia, Africa and others) has also remained approximately constant for the last 10 years.
Most funds are active, but some trackers (Global / small cos) are included. I keep track of value weekly, but tend only to take profit when one fund / area increases out of step with the rest of the portfolio.
Geographic regions tend to go in and out of fashion, but as long as the dividend income is coming in at the level required having an even spread tends to mean an area that is down over one period will catch up in another.
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A closely related aspect is the question of acceptable performance. I've never strived for endless profit, instead I set a target each year, usually between 12% and 15%, once I reach that target I begin to derisk….me reducing equities and diluting my US holdings was a part of that this year albeit, those things may become permanent features hereonin. It doesn't concern me that I might have achieved a higher return, if I'd done things differently or behaved in a different way. All that matters is reaching my target, the means by which I achieve that is laregly irelevent to me. Most of the equities funds I hold are out perfomers that exceed the index by a decent margin, any possible underperformance needs to be taken in that context.
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A second response to this.
Bloomberg this morning reports:
"The MSCI Asia-Pacific Index rose 0.7% to a record. The gauge is up around 13% so far this year, its best start to the year relative to the S&P 500 this century. The US gauge is up just 1.4%.
(Feb 12): Asian equities advanced for a fifth day on Thursday, stretching their lead over US peers this year as relatively cheaper valuations and firmer growth prospects lured buyers. Treasuries held their losses after stronger US jobs data".
This was this 76 year olds view of the investing world, back in April last year, after tariffs disrupted markets and caused me to question a large allocation to the US market……for the time being, my view remains the same. If capitalising on that scenario exposes me to accusations of short termism or unwarranted meddling, so be it because my objectives are to achieve my targetted return, not to play by a set of rules that are, rightly or wrongly, not adopted by the majority. Having said those things, would I advocate that a twenty something year old investor do the same thing? Probably not, not if they want to adopt what is regarded as best practice and conform with the traditional approach.
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So if I'm understanding correctly, the process is:
- Identify funds whose recent past performance is in excess of the target you set, such that you believe they can deliver the performance you seek over a short period of time
- Invest in these funds, setting an upside limit for the year
- If the funds reach this upside limit, derisk so that your capital is not 'at risk' for the remainder of the period
- Rinse and repeat
It seems apparent that aiming for a 12-15% return each year is very aggressive, so the funds that would be able to deliver this in a fraction of a year will be very high risk and volatile. A problem I can see is that if you only derisk once you've reached your target, what happens if the fund remains flat or drops? It seems like an over-leveraging of risk tolerance.
The other issue is that this is effectively timing the market. You are seeking to identify the winners for the next year based on past performance. When there is a rising tide and all ships are being lifted, that may work. However, in choppier waters it will be extremely difficult. When the tide isn't rising, a strategy where you're essentially limiting your upside, but keeping all of the downside is likely to come unstuck. We've discussed example funds on other threads and while the short term upside and downside capture ratios currently look attractive, zoom out to gloomier periods and a very different picture is painted - one where virtually all of the upside (which you wouldn't have fully captured) is given up by the fund. The net effect would be that you would be more in the red than someone who had not traded in and out on the way up.
But as I understand it, this is something you are doing with a small part of your portfolio that is not required to meet your needs. So not the end of the world if you have an unlucky sequence of returns.
I suppose an approach like this isn't without precedent. Something similar is seen in the world of stock trading, where analysts and traders set buy and sell targets on individual stocks. Often accompanied by a stop price for an open position. It's not an approach I've heard of being applied to investment funds.
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