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Weekend reading: Moving (and) markets edition

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Fear not friends, and back to the drawing board foes. I’m alive and well. Thanks for the several notes of concern.

A few readers mused whether the – ahem – tumult of the past few days had sent me into exile?

Had my 100% all-in bet on a low volatility ETF blown up, taking my wealth and credibility with it?

Alas, no cigars. It takes much more than a 5% swing in my portfolio to send me packing. Besides, this is too much fun.

All week I mentally drafted and redrafted a post about the fascinating return of market volatility in the past 10 days.

Unfortunately though I first had no time to write it, and now I’ve no Internet. More on why below.

It’s probably just as well. Whenever the stock market makes the mainstream news, there are worse rules of thumb for long-term investors than to turn that news off.

Watch the rugby instead! I found this past week or so invigorating, but I’m a fanatic. You don’t need to be.

Musing on the markets

Here’s a few quick thoughts – feel free to skip if you’ve sensibly developed an intolerance for one person’s speculations:

  • Talking heads on CNBC and elsewhere blamed the volatility on robot traders and ETFs and the new era of Skynet and Robocop. This is mostly nonsense. Volatility has always existed in markets, especially at times of regime change, which is what I think this. (Regime change is loosely a systemic change in fear levels or rate or inflation expectations or a momentum change).
  • Hilariously, the same pundits have spent two years blaming the very low volatility we’ve had on robot traders and ETFs. Equally nonsense. The market has been through low volatility periods before, too.
  • If anything novel was dampening volatility, it was almost certainly very low interest rates since the financial crisis. It is that regime that seems to be ending.
  • Higher bond yields were always going to be reflected in changing equity valuations. That is one reason why I have warned those who feared bonds were excessively expensive to remember that equities are partly priced off bond yields. See my article on the problem with low interest rates for more.
  • I personally believe the market has detected the return of inflation, and is repricing accordingly. To some extent the sudden and sharp disruption to the long-prevailing millpond conditions was probably because lots of active money (e.g. hedge funds) had been betting explicitly on low volatility. But as I allude to in that article I linked to above, it’s also because equities are priced partly off long-term yield expectations.
  • None of this works like clockwork, not least due to technical factors. So for example bonds and equities can go down at the same time together, and will if the market expects increasing yields in the future. Repositioning an entire market structure creates its own short-term dislocations! It’s over months and years we’ll see what was really going on, not hours or even days. Diversification doesn’t deliver minute-by-minute compensations.
  • It is completely true that several daily rebalanced and in some cases leveraged exchange-traded products ‘blew up’ when volatility returned and promptly screamed off the charts. A few closed down. The products didn’t fail as such – they did what they said they’d do, in these conditions. You were silly if you’d bet the farm on them. Surely nobody did?
  • More relevant (far bigger) are the so-called risk-parity funds that try to balance equities and (usually leveraged) bonds to the optimal point for the best risk-reward returns. As volatility increases, their risk models change, which means they need to rebalance, which can prompt selling, which will increase volatility, which feeds into the model, and so on.
  • To that limited extent there was a feedback mechanism in the market. But I still think it’s wrong to blame ‘robots run amok’. Humans would do the same thing, only more slowly. Higher volatility means more value at risk in a portfolio. For some money managers that can prompt selling riskier assets (shares, maybe certain kinds of shares) to reduce risk.
  • Once this (supposed) ‘de-risking’ began, it was going to go on for a while. Personally I think it will likely continue for some time to come, and we may well see a small bear market develop over the next few weeks and months. Your guess is as good as mine though. I’m opining for fun – nobody knows!
  • High equity and bond valuations exacerbate all this, for many different reasons. But cheap equity valuations are no protection once the selling begins.
  • It’s different for bonds, because the pension world needs to own them to match liabilities (and arguably there’s not enough around.) There’s a permanent bid, and at some point a yield will be found where bonds stabilize. Probably higher than here, across the world.
  • Remember this is almost certainly a market correction, not an economic disruption. Growth is great everywhere apart from the UK, which is lagging because of the Brexit baloney (as it will likely now do for a decade, as even the government’s own forecasts have now admitted).
  • Great growth does imply higher inflation, but also a good environment for companies to grow profits, hire more workers, increase wages, and so forth. These are ongoing ills that do need addressing. In the long-term this is a good problem to have.
  • If you’re an active sort, you might want to make sure you own companies with exposure to bulk commodities. (Passive investors will have some exposure anyway in FTSE trackers etc). I’d consider owning some gold, too. (Don’t expect gold to go up the day markets go down, or anything so orderly. If share prices follow a random walk, gold follows the random walk of a drunk. But eventually he makes it home.)
  • People will say “you have to be in equities because they will protect you against inflation”. But remember, we may have already had our inflation protection from shares. Pundits tend to miss this – global trackers have been going gangbusters for a decade, and they could not continue like that forever. You get your on-average higher returns from shares averaged over many years. i.e. High returns in recent years could have ‘borrowed’ some returns from the future.
  • The best thing is a balanced portfolio that you set up for all-weathers. Many Monevator readers – particular the passive-minded who find my co-blogger less distracted than old gadfly me – have such portfolios. Along the lines of our Slow and Steady model portfolio.
  • Such passive investors should probably do nothing in the face of this return of volatility (and potential regime change towards higher yields). Continue with your plan, and rebalance when you’d planned to rebalance. Don’t panic!
  • The exception is if you’ve now realized you really own too many equities as you’ve watched your portfolio oscillate this week. Be careful! Most people find it infinitely easier to see shares go up than down. Do nothing is a plan of action to stop you focusing and fussing, and selling when markets are down. But if you genuinely feel you own too many shares in retrospect, it’s probably better to get comfortable by reducing your allocation a little (I’d switch to cash not bonds for now) rather than risk selling everything if we have a bigger correction.
  • Markets go down as well as up. That is not small print, it’s chalked into the walls of the stone Temple of Investing. We were bound to see falls again, and while this week has had some fun elements we will see far worse in terms of peak-to-trough declines in the future, some day.
  • Volatility is a feature, not a bug!

Not (yet) all mod cons

Right, so I’m in a coffee shop. Why? Because my new flat has no Internet yet.

Yes, I’ve bought a property and moved this weekend!

Let’s discuss why, how, and whether it was a good idea in a future post. I hope to be back to normal in a fortnight or so – at least back with links by next weekend.

But for now my cup running empty. The millennials around me seem happy to occupy their tables all day with an espresso bought six hours ago, but I’m made of more self-conscious stuff.

Take care, don’t do anything silly with your investments – and look out for The Accumulator’s broker table update on Tuesday!

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{ 40 comments… add one }
  • 1 Retirement Investing Today February 11, 2018, 3:35 pm

    “Such passive investors should probably do nothing in the face of this return of volatility .” I went all out this week and recorded some BLND divi’s in my spreadsheet, reinvested some divi’s into VEUR and updated my overall journey to FIRE spreadsheet as I’ve done every weekend since 2007. Otherwise I slept very soundly.

    Genuine congratulations on the property purchase. I hope it brings what you desire from it. That said I can’t help but think about the phrase when the last bear becomes bullish the market can then turn down (or similar)…

  • 2 Survivor February 11, 2018, 3:59 pm

    Congratulations Dude on your freedom from rental servitude….. hope it goes well 🙂

    In the spirit of pitching in, we could all put in a link as a one-off this week, guided by what you have done in the past – so if that’s Ok with you, here’s mine:-

    Citizens doin’ it for themselves – a significant new build experiment/site in Oxforshire, perhaps a straw in the wind by the powers that be, on whether to allow us real choices:
    https://www.theguardian.com/money/2018/feb/10/custom-self-build-housing-graven-hill

  • 3 Accidental FIRE February 11, 2018, 6:08 pm

    The robots are our friends and I, for one, welcome them as our new overlords.

    Congrats on buying a property!

  • 4 Tyro February 11, 2018, 6:10 pm

    Congratulations on the flat! And what good timing to shift money out of equities and into London property …..

  • 5 Snowman February 11, 2018, 7:00 pm

    Congratulations on your new home!!!

    https://www.youtube.com/watch?v=_m2NyS3IDjE

  • 6 Financial Samurai February 11, 2018, 7:18 pm

    Wow! Congrats on the property purchase! I look forward to reading about your why and how. It does seem like property prices in your part of the woods is slowing down. If slowing down in expensive coastal cities as well in the United States.

    I hope you’re wrong about a bear market this year.

    Sam

  • 7 SurreyBoy February 11, 2018, 7:34 pm

    I’ve had a busy week but saw the headlines about apocalypse now in the markets. I had a look today and in my ISAs the funds have dropped between 1% (bonds) and as much as 8% on the shares. Overall an ISA drop of around 3%. My SIPP took a 4% hit, with the gilts and bonds dropping slightly whilst the shares fell down the well.

    Overall, diversification seems to be working. The ISAs are doing something different to the SIPP, and the constituent elements are behaving differently. So far – nothing has spiked up to counter the drops, but not everything has fallen at the same rate.

    I did a bit of rebalancing last September when I realised some of my shares had been to the races and come home loud and fat. I trimmed around 10% and stuck the cash into very boring bonds. I wondered long and hard before doing it, but the chicken in me decided to take the free upside and not be greedy. Long term I have no doubt made a bad move, but if it keeps me at the table it was probably a positive action.

    I can’t get too worked up about what I’ve “lost” in the past week. However, despite the small percentages it does add up to over a year of living costs and when I look at it that way it does hurt a bit. It raises the interesting question of what point do I really start to worry?

    I think I know the answer. With a 65/35 shares/fixed income mix I reckon I can live with a shares drop of 40% and the bonds down 10%, taking me an overall drop of 30%. Now the funny thing here is that I think I would stay calm but I don’t really know.

    In 2008 I had a pretty decent wedge in the SIPP but at that point had no interest in FI or investing. I must have hemorrhaged paper losses for month after month and never noticed. It seems amazing to me today, but that’s the honest truth of it.

    So im greeting this week’s wobble with a degree of mild curiosity.

    How is everyone else feeling?

  • 8 Hospitaller February 11, 2018, 7:52 pm

    I think you are right about increasing bond yields being behind last week’s equities movements. I expect to see more of this over the next year. I also share the feeling that we may have already had some of the future equity growth ie have “borrowed” it from the future. Does this worry me? Not really – I have been taking profits from equities as things went along and putting that into cash, gold and 0-5 year bonds and so equities are now 45% of my portfolio (down from a peak of 7o% post the financial “crisis”). The thing which may most occupy my mind this year is when to go into 7-10 year US Government bonds (GBP-hedged) which I will probably do if/when the yield hits 3% – currently 2.8%. If/when yields get there, I will probably start loading up on these quite heavily; after the last real crash, the politicians (I cannot recall a bunch – from any persuasion- that was as intellectually and morally weak as those of this millennium) left the central banks to do the remedial lifting – I suspect that will happen again and would like to be in a position to benefit next time the USA does QE/drops yields. As for “Brexit”, well, we are in heck of a mess when the government of the day essentially tells folk to stay quiet and follow their exit intentions, while at the same time trying to hide some grim forecasts of consequences from the people they are supposed to represent. Alice In Wonderland stuff. We have not “taken back control”. On the contrary, we have lost any sense of statesmanship and probity.

  • 9 egremont February 11, 2018, 8:16 pm

    @Hospitaller – about hedging those Treasuries – a GBP bought you two USD in December 2007, and 1.4 USD in December 2008. Just saying.

  • 10 Dave the hedgehog February 11, 2018, 8:42 pm

    Phew my weekend is complete. Monevator is back! Glad all is okay.
    Congrats on the flat

  • 11 Neverland February 11, 2018, 9:21 pm

    Neutral interest rate with inflation where it is now pre-financial crisis would have been a five or six percent Bank of England base rate

    Would be interesting to see how much of the current bs would be around for that

  • 12 Greg February 11, 2018, 9:40 pm

    I’m by no means an expert but the risk parity justification doesn’t sound to convincing to me:
    https://www.aqr.com/library/aqr-publications/not-risk-parity-funds

  • 13 FIRE v London February 11, 2018, 11:44 pm

    @TI – Congratulations on your extra diversification, and on (I imagine?) joining the leveraged masses. I trust the new pad is in London, and that any crystallising you had to do occurred more than two weeks ago.

    This is a great post – the more so because there are many others on a similar theme but none that contain the same depth of experience, insight, wit and wisdom. Thank you.

    For me this month the biggest challenge to my psychology is seeing that, after modest withdrawals from the portfolio, the market correction has taken my portfolio back to a level it was last at 12 months ago. When I made >10% last year, and this month so far has only seen a drop of around 4%, that has me double-checking the calculations. No errors found so far….

  • 14 hosimpson February 12, 2018, 7:29 am

    Congrats on the new flat 🙂 So, it’s boxes everywhere, most clearly labelled, some not so much, the joys of unpacking and settling in a new home ahead.

  • 15 John B February 12, 2018, 8:41 am

    I’ve done nothing this week except plan my holiday. I don’t do market timing. My next transactions will be in April when I sort out ISA/CGT at year end, except I’ll have to move them around to avoid another holiday…

    Don’t let the markets get the whip hand.

  • 16 ermine February 12, 2018, 10:21 am

    Congrats on the flat! And to the next few months of “where the hell did I put that thing” 😉

  • 17 Fatbritabroad February 12, 2018, 10:50 am

    I’m 100% equities in both my isa and my company pension (both trackers. Vls 100 in my isa and aegon global equity tracker in my pension). I saw about 2500 knocked off my 25k isa and 10 grand off my pension so a good test for my reaction accepting as people have said this was a minor correction. I added an extra few hundred In to my isa and have increased my monthly amount by 50% to try and get a bit more in in the dips. No worries so far I’m 37 and trying to go all out for a few years accepting the wild ride while I don’t have children etc to bleed me dry

  • 18 UK Value Investor February 12, 2018, 11:06 am

    Personally I’m amazed by all the media faff over a measly 10% “correction”. I guess the media needs something to write about and simply saying “the market has hit a new high” gets a bit boring eventually.

    Here’s my standard response to this sort of thing:

    For long-term investors, minor corrections are utterly irrelevant. Don’t think about what happened to the market this week, think about where the market will be in five or ten years and ask yourself whether you’ll even remember this correction by that point.

    My guess is that the FTSE 100 could easily double over the next 10 years (and you’ll get lots of dividends along the way given that the FTSE 100’s yield is currently over 4%) and that no, you probably won’t remember this correction in 2028.

  • 19 The Rhino February 12, 2018, 11:36 am

    yep – well done on the purchase of TI-Towers

    I haven’t seen any email invite to the housewarming yet?

    should I be checking my spam folder or something?

  • 20 Gadgetmind February 12, 2018, 12:32 pm

    Congrats on the flat and let’s hope there are still more property bears left to capitulate. 🙂

  • 21 Factor February 12, 2018, 12:50 pm

    Last week was the storm before the calm.

  • 22 Neverland February 12, 2018, 1:08 pm

    @Gadgetmind

    Since you are trolling I will bite. Back in the distant days of 2016 the editor of the Evening Standard (who?) commissioned this from HM Treasury (a.k.a. saboteurs, enemies of the people etc.)

    Page number 8 has the relevant details

    Severe shock scenario = UK leaving the EU under WTO rules = house prices – 18%

    That scenario looms like an iceberg on the horizon

    https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/524967/hm_treasury_analysis_the_immediate_economic_impact_of_leaving_the_eu_web.pdf

    I would remind you of Hemmingway’s description of how one goes bankrupt “gradually…. then suddenly”

  • 23 2021er February 12, 2018, 1:21 pm

    First post, but been reading this excellent site for a while. I’m just over 3 years away from retirement, but have been investing long enough to remember much more tumultuous markets. I’m currently cautiously invested: 25% cash, 33% bonds, 42% equities. What’s my greatest worry? Not short-term movements, with a healthy proportion in cash I’m reasonably resilient to them. What concerns me more is the medium term 5-10 years and the possibility, some might say probability, of market returns on both bonds and equities that will be significantly below historical averages.

  • 24 The Rhino February 12, 2018, 4:26 pm

    @NL – I for one would dearly love that to happen.. ideally a fair chunk more than 18%?

  • 25 Neverland February 12, 2018, 5:28 pm

    @rhino

    New build flats in arse-end parts of London have been sold as prime London property to dumb foreign money for prices starting at USD1m each. I doubt that will end well

  • 26 beeka February 12, 2018, 5:35 pm

    I’ve been meaning to make use of my ISA allowance for the past few months but have been too busy / lazy to do so. Having inadvertently avoided losing 10% of my new investment, I am left wondering if I should attempt to “time the market” and hold off a few weeks… or buy now and be happy that if the market drops another 10% that it wasn’t the 20% it could have been.

  • 27 Lauraw February 12, 2018, 6:28 pm

    Glad to hear all’s well (as well as can be in a week where one has bought London property at least!) – I’d been wondering what was up.

    As per the link sharing suggestion above, I read a great article from Collaborative Fund on bubbles, comparing the interests of different traders competing in the same market – e.g. day trader v mid-long term investor.

    Link is to the PDF:
    https://t.co/XZSfdAZdFA?amp=1

  • 28 William III February 12, 2018, 7:25 pm

    “If you’re an active sort, you might want to make sure you own companies with exposure to bulk commodities. (Passive investors will have some exposure anyway in FTSE trackers etc). I’d consider owning some gold, too. (Don’t expect gold to go up the day markets go down, or anything so orderly. If share prices follow a random walk, gold follows the random walk of a drunk. But eventually he makes it home.)”

    Do you intend this as an inflation hedge (i.e. gold) or buying at the bottom of commodity cycles (oil, agri commodities)?

  • 29 dawn February 12, 2018, 8:47 pm

    @2021er
    yes ,same concern as myself,,,but they might be wrong and the next 5-10 might be fantastic returns,,if not ,it may mean drawing alittle less from portfolio than the 4% I could potentially be drawing in 2.5 years from my portfolio so in the same boat as you.

  • 30 Noodle February 12, 2018, 9:32 pm

    ‘re ftse doubling. Perhaps but what I find amazing is the ftse is back at the level it was in 2000! 18 years sideways! Give or take some servere up and downs…….

  • 31 Gadgetmind February 12, 2018, 10:26 pm

    FTSE back at the same level if you carefully burned all dividend cheques rather than reinvesting them.

    Here’s how it tracked after 1999 – see how FTSE and FTSE Total Return show very different things?

    Dec30 1999, FTSE 100=6930, FTSE 100 TR=3141 * (Dot com crash high. Reached 6950.6 during day.)
    Mar12 2003, FTSE 100=3287, FTSE 100 TR=1624 * (Dot com crash low)
    Jan30 2006, FTSE 100=5780, FTSE 100 TR=3141
    Jun15 2007, FTSE 100=6732, FTSE 100 TR=3851 * (Pre credit crisis high)

  • 32 Gadgetmind February 12, 2018, 10:28 pm

    BTW notice how capital values halved. Don’t bore me with any wobble where capital values don’t halve as I’ve been there, done that, and come thorough it. The current wobble is welcome noise.

  • 33 Ms ZiYou February 13, 2018, 12:42 am

    Congrats on the new pad, although it does feel like a brave time to make that decision. I’m thinking the property market will show under inflation growth over the next few years, and I know loads of people ready to buy as it goes down a step. So I think there are a lot of canny buyers just waiting to pounce, then we’ll get back to above inflation growth. But as with everything, it’s all speculation.

    On the stock market, I’m chilled and sticking to the plan, the dip isn’t even that big..

  • 34 Mathmo February 13, 2018, 1:04 am

    Great news on purchasing the castle. Hope move goes well and the isp is less frustrating than par for that industry. Great signal for the rest of us that it’s time to hunker down for the great property drawdown.

    Meanwhile in equities: was I the only one screaming for more? A proper fall-flat-on-it’s-face bargain basement come-and-get-it-while-it’s-hot market halving? Markets moving back to last October’s prices (when I was firmly stating they were over-tepid for my liking) is hardly the big one. Maybe just a dress rehearsal to check everyone’s panic sell buttons are working.

    Meanwhile a stupid backstop buy limit order that I’d put in to rebalance into US equities and had completely forgotten about accidentally triggered last week near the bottom of this dip and I’d made a decent return by the time I saw the contract note. There’s more to this rebalancing premium than meets the eye.

    Look forward to the house-warming…

  • 35 JimJim February 13, 2018, 7:58 am

    Congrats upon the cassa. Never see it as an investment in anything but happiness. The one you live in will only make a return if you see sense and move out of London to a more civilised area of our great land. (mabe a FIRE sale???) It may in time yield a rent free existence or a security blanket if all else fails at best. BUT, it should always make you feel happy. Great website, much appreciated.

  • 36 Rob S February 13, 2018, 12:34 pm

    What a couple of weeks! New data shows annual UK house prices fell for the first time in six years at the start of 2018 amid a slump in demand. Values dropped 0.4% in January compared with a year earlier and the study also revealed London suffered a sharp 4.3% fall in the fourth quarter of 2017, its worst performance since the depths of the financial crisis in 2009.

  • 37 Brod February 13, 2018, 1:34 pm

    Well, that was fun while it lasted. Didn’t even notice until markets were on their way back up… I was 100% equities until about a couple of weeks ago when I thought things looked a little frothy so I re-balanced 10% to Lyxor 0-5 Year Gilts and some Gold (un-hedged, I couldn’t swallow the 0.5% OGC difference). Enough for a buying opportunity.

    I was burnt by the dotcom crash as for my first ever investment I put a £30k windfall into the flavour of the month tech fund (from Aberdeen) and just tuned out for several years. During the 2007/8 crash I was in the midst of a SIPP transfer so was all in cash. By the time I got back in markets were back to 80% or something so maybe I even gained a little but well remember the “this time it’s different” and run for the hills panics. I think we still have to unwind the QE and BoE loans to banks are due to expire at the end of the month, aren’t they? The next leg down?

    I’ve got a 15 year horizon till I need the pension anyway, and expect to have my state and Civil Service pensions to put a £15k floor under me in retirement. It’s more for my future widow. SO I hope my risk tolerance if relatively high but as I get a larger and larger pot,. the sums become more consequential.

  • 38 Learner February 13, 2018, 9:47 pm

    With property, you can be a forced buyer, and it’s probably about as fun as being a forced seller.

    “Maybe just a dress rehearsal to check everyone’s panic sell buttons are working.”

    Not well, as it turned out (though not for lack of trying) https://www.cnbc.com/2018/02/06/fidelitys-website-reports-temporary-outage-during-wild-trading-in-us-markets.html

  • 39 Jon February 14, 2018, 9:16 pm

    Congrats on you home purchase. Just out of interest, did you cash in some investments to pay for it or stay fully invested and get a mortgage?

  • 40 The Investor February 15, 2018, 2:01 pm

    @All — Thanks very much for the kind comments! I’m loving being in my own place. Whatever blend of practical reality, cultural conditioning, and the calm before the sh*t hits the fan that I’m living in, it’s working it’s traditional magic on me. 😉

    As mentioned in the post I am not going to get into how / why / whatever about the house here, as I fully intend to write this up in the next few weeks, as it might at the least provide some food for thought, and it will only mean repeating myself and the comment thread.

    Suffice to say I don’t have huge expectations for price gains in the next 5-10 years, perhaps not much ever in real terms, though who knows. Am steeled for potential falls. If I can keep the nominal value over the next five years I’ll be very happy. Anything else is upside. (Quite amusing sporting this kind of mindset when visiting properties with estate agents. They are a tad discombobulated.)

    In terms of frightening talk of crashes, been there, done that, on both sides of the fence. I have an ever-bearish investor friend who literally made me promise to text him if I ever exchanged. The hunt went on for so long he forgot about it, but when I did he immediately wrote back “You are not serious?!” and put on some shorts, as he said he would! 🙂

    I still think London property as an asset class is overvalued to very overvalued. But I’m getting on.

    The rest can wait for the post!

    (Thanks to those who dropped some links in, too. Shame a few more didn’t add any. Not likely to get connected until late next week and work-work is occupying most of my digital nomad wi-fi scavenging so not sure whether I’ll be able to do Links this week either. Am doing a fair bit of reading via phone, so it’s possible if I can block out three hours.)

    Just finally, I’m not calling for a crash in the market, and don’t believe I wrote that. (Am not looking at article, am on phone in comment moderation section!) I do think we’re potentially a choppier period though. That said I saw the VIX was back below its long-term average (for what that’s worth, which I’d argue is not much, but others look at it) so who knows. 🙂

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