Your correction strategy?

BrockStoker wrote: »

What would be the point in trying to time the market for only a 3-4% gain? I'm usually looking for at least around a 10% boost initially, with hopefully plenty more gains to follow (if I picked right).

Most people would say there is no point in trying to time the market at all.

I should also say that the aim of this portfolio is to double my initial investment over the course of 5-10 years (then repeat), as well as provide me with some income, so it (and the constituent funds) need to be super-aggressive.

I would think even with an aggressive portfolio, to double your investment over the next 5-10 years, as well as taking income, seems very optimistic in my view after such a long bull run, but good luck.

Audaxer wrote: »

Most people would say there is no point in trying to time the market at all.

Each to their own. I'd rather try to use the volatility to my advantage, than leave it to random chance when I re-balance.

Audaxer wrote: »

I would think even with an aggressive portfolio, to double your investment over the next 5-10 years, as well as taking income, seems very optimistic in my view after such a long bull run, but good luck.

Thanks. I agree. I purposefully gave myself a tough target. It does not matter to me too much if I achieve the target or if I fall short, since I have a longer time horizon than 10 years. If the bull run ends, then so be it, but I want to make the most of it while the going is still good.



I also want to diversify my portfolio further with slightly more defensive assets (as the portfolio grows, assuming OFC that the bull run has not already ended), but not quite sure exactly what yet.

I re-balance twice a year with the next one due in December.

What is giving me more pause for thought is if I should increase my equity holdings gradually in line with market falls should they continue.

Given the average bear market drop is c35% and we have had two nudging 50% since 2000 then it 'feels' like it makes sense to start lifting the equity percentage in my pf by (for arguments sake) 5% for each 5% fall beyond 30%.

When I floated this idea on another forum I was linked to a presentation showing that this was a questionable approach. The actual phrase used as I recall was "that's a stupid idea".

I still find it counter-intuitive that raising your risk as a market falls towards its extremes of historical volatility is a sub-optimal course of action. If you were happy to buy at the peak why wouldn't you be happy to be buying even more at 40% off that peak?

username12345678 wrote: »

I still find it counter-intuitive that raising your risk as a market falls towards its extremes of historical volatility is a sub-optimal course of action. If you were happy to buy at the peak why wouldn't you be happy to be buying even more at 40% off that peak?

Because that is the exact opposite of how markets work. When markets are 40% off that peak nobody feels happy about buying, they feel bloody miserable about buying, they'd rather gouge their eyes out with a rusty spoon than buy. That is why markets are 40% off the peak in the first place.

Let's say you started with 60% equities. If you weren't happy to hold 70% equities when markets were up and everyone was optimistic, you won't be happy to hold 70% equities when markets are down and everyone is panicking and saying that it's the worst time to invest ever.

If you were happy to ignore the market consensus then you would have been holding 80-100% equities right from the start.

Buying more equities purely because the market has gone down is chasing your losses. (Buying more equities because cash has just become available is totally different.)

So the market has gone down by 40% and you're feeling rotten, but you grit your teeth and raise your equity exposure to 70% saying to yourself "when markets go up I'll be laughing". Then markets fall by another 10%. Now you're in over your risk tolerance, you're feeling even worse about your investments, and you've just made a bad call that has exacerbated your losses. What now?

If you're one of the 10% of investors that ignores market sentiment and takes the long view, you can increase your equity holding to 80% and you'll be laughing when markets go up. Except you can't, because if you were in that 10% of investors, you would have been holding 80% equities from the beginning.

If you're one of the 90% of investors that doesn't, you'll say "this time it's different", you'll say "I made one bad decision but I'm not going to make another", you'll say "this isn't like 2009 when everyone could see it was the bottom of the market, this is 2020 when the debt bubble has finally burst for good and all the experts predict a decade of recession and the far right/left are taking over Europe, it's time to hold what I have". You'll listen to the experts and sell everything.

You can tell me "I'll do no such thing" and I'll believe you. I have no reason to doubt a person. However, people that follow this strategy will achieve only one thing, which is to go in over their risk tolerance at the worst possible time to be in over your risk tolerance, make themselves more likely to panic, and make themselves more likely to sell at the bottom of the market and lose money.

Luckily, this is a largely theoretical scenario because most people in that 90% would not increase their equity holding in the first place - it would take all the efforts of this forum or their financial adviser to persuade them to hold onto their 60% equities. The other 10% will not increase their holding as they already hold 80-100% equities.

"People are smart, they can handle it."

"A person is smart; people are dumb, panicky, dangerous animals and you know it."
- Men In Black

Malthusian wrote: »

If you were happy to ignore the market consensus then you would have been holding 80-100% equities right from the start.

I disagree - Have to say I'm with username.. on this. Buying when markets have fallen and selling back out when there on the up seems an eminently sensible idea to me.:D

I completed a risk questionnaire a while back and came out at 80-100% equity but I was actually very concerned about stretched valuations so decided to stay with a 60:40% split and with much of the non equity portion in cash.

As the market slips I intend not only to rebalance to maintain my equity proportion but to increase my equity proportion towards 80% after a 40% drop perhaps edging towards 90% if further drops occur.

I do agree with you that it is easier said than done - it goes against the grain. I have a bit of a tendency to bury my head in the sand when things go bad, its why I am trying to put in place a definite plan and set of rules to steady my nerve.

My current plan is to rebalance at 25% down, to a 70% equity position and at 40% down, rebalance again to 80% equity. What I am trying to get my head around is if I should be make it a continuous process gradually reducing cash and selling bonds all the way down or wait for trigger points which if missed could mean I missed out.

I am leaning towards the forma - I know the analogy of catching the falling knife is often quoted, but I really think that only applies to individual shares and is irrelevant for funds/trackers. The way I look at it I might well end up at the bottom of the market with less than I would have, if I had left well alone, but I will still be better off than if I went in with 80% equities.;)