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Weekend reading: Hello bear market, my old friend

Weekend reading

Good reads from around the Web.

This week saw North America finally bite down on the stock market rout that has roiled most of the rest of the world for the past year or so:

  • The UK’s FTSE 100 index is now down nearly 18% from its peak on 27 April 2015.
  • The German Dax index is down 23% since 13 April.
  • Emerging markets such as Brazil are down far more again since their peaks a few years ago.

These are bear market declines – or near as damn it in the case of London.

Armed with these numbers, it is somewhat amusing to hear U.S. commentators explain why a bear market in the US isn’t possible due to the state of the global economy or low interest rates across the developed world.

If it’s clearly already happened elsewhere, why not there?

Indeed in reality most of the US market is already in bear market territory, in terms of peak-to-trough declines.

In the past year only a handful of stocks such as Facebook and Amazon held up the US indices. Now they’ve rolled over and the indices have come down.

That’s the bad news.

But there are plenty of reasons why it’s not really so bad.

It is happening again

First and foremost is that if you’re a sensible passive investor, you know this sort of thing is going to happen and you’ve built your portfolio around it.

For example, our Slow & Steady model portfolio will keep trucking on, despite having plenty of exposure to global equities.

Sure, if this continues then 2016 isn’t likely to be a banner year for passive portfolios.

So what? It happens.

One of the most amusing things I’ve heard in the past few days is otherwise sensible investors such as the veteran Leon Cooperman of Omega Advisers blame some of the US volatility on the post-financial crisis regulatory landscape that has restricted the ability (or incentive) of intermediaries such as investment banks and dealer-brokers to hold inventory1 and so reduce volatility.

These old-timers usually also point at robot traders for good measure.

Now, I happen to agree liquidity has been reduced by financial regulation, and I don’t doubt momentum-based traders are influencing the markets.

But crashes have happened pretty regularly ever since we’ve had markets, and long before quant funds or the shrinking of bank trading desks.

Indeed recent years have been marked by relatively low volatility in America – despite the prevalence of these factors.

You can hardly have it both ways!

Therefore, we can safely bin these theories as poppycock.

Things fall apart

Of course people always want explanations.

My best one is that the US market has looked expensive for years, and traders finally found some excuses – the US rate rise before Christmas, the otherwise irrelevant volatility in China2 – to shed some of their pricey-looking exposure.

But really, who knows?

As Robert Seawright explains on his blog:

Wildfires, fragile power grids, mismanaged telecommunication systems, global terrorist movements, migrating viruses, volatile markets and the weather are all self-organizing, complex systems that evolve to states of criticality.

Upon reaching a critical state, these systems then become subject to cascades, rapid down-turns in complexity from which they may recover but which will be experienced again repeatedly.

This phenomenon was discovered largely on account of the analysis of sandpiles.

Scientists began examining sandpiles and discovered that each tiny grain of sand added to the pile increased the overall risk of avalanche.

But which grain of sand would make the difference and when the big avalanches would occur remained unknown and unknowable.

For passive investors, the best way to combat the unpredictable is to control what you can – your exposure – by rebalancing your portfolio from time to time.

This way you’ll trim more expensive (and perhaps more vulnerable) asset classes over time and top-up cheaper ones, without having to try to make potentially ruinous market calls.

The other thing to remember is that volatility is great for long-term savers.

We’ve discussed this many times before, but I’m always up for new ways of hearing the same important thing.

This week The Escape Artist did the honours:

Lower prices mean better value and higher future expected returns for investors. So the longer that share prices are low during our period of net saving, the better for us…even though it doesn’t feel that way.

So when investing, it’s best to be more aggressive and buy at times when share prices and valuations are lower… even though we may be feeling rattled by recent price falls.

Check out his table comparing the returns from investing into a rising market with putting money into a volatile but overall flat one if you fancy exhaling “ah, I get it”.

You might even treat the next round of market falls with a smile.

You’re here for the long-term

What is not advisable is panic.

To this end, The Reformed Broker Josh Brown has delivered a good one-two-er on the psychology of investing through volatility.

His comments on the wisdom (or otherwise) of passive saver-investors trying to turn themselves into market timing geniuses when stock markets fall is on-point for everyone saving for their retirement:

…accept the fact that risk is a given no matter what.

But you have a choice: You can decide when to take the risk, today or in the future.

Rational investors would prefer to take investment risk today, accumulating assets while coping with drawdowns and fluctuations in value.

Only an insane person would choose to take their risk at the back end of their life – being short of money in old age when it is nearly impossible to earn more money.

You can risk the volatility today or the chance of being broke later, your choice, but you must choose.

Sitting in cash may temporarily feel better because there is a sense of security that comes over us when the value of our account ceases to fluctuate.

But you’re not safe, you’re merely gaining the stability of a unit of currency in exchange for the risk of losing future purchasing power.

Even presuming there is a bigger crash coming that it would be profitable to sidestep, once you decide to sell up your portfolio on the hunches of analysts, you’re going to have to be right at least once more if you’re going to stay invested.

Or, as Brown put it in pictorial form:

market-timing

This is going to hurt… a bit

The obviousness of all this on a sunny Saturday morning doesn’t mean that it is easy in practice.

Usually quite the opposite.

Once you get past the superfluous complication some try to foist on it, constructing a passive portfolio is easy – so easy a child could do it.

However actually investing regularly, rebalancing, and having the discipline to adjust your allocations based on your stage of life, not on scary newspaper headlines – that can be hard.

So while it might be offensive to some of the Monevator faithful, I do have some sympathy for Brown when he says:

The fact is, most investors cannot tolerate the full brunt of a bear market psychologically, and will end up doing the perfectly wrong thing at the most inopportune time.

You will see how many newly-minted Vanguardians and robo-clients vomit up their equity portfolios toward the end of whatever this market episode becomes.

And so I would say that if you believe yourself to be susceptible to this sort of thing – and there is no shame in being emotional about money, we all are – now would be a good time to make sure you are getting good guidance from an advisor who you trust and who understands what’s happening.

Those of us who have had a lot of contact with investors – whether we are investing bloggers or Wall Street denizens – have seen the foibles of the typical investor more than most people.

And I’ve seen we’re all pretty foible-d.

Is it 2008 all over again?

For example, I’m a believer in passive investing who thinks it’s what you should do, too, but who himself runs his own active portfolio like he’s a wannabe George Soros with a Napoleon complex.

Hard to get much more conflicted than that!

So when stock markets fall fast – and I do even worse than the benchmarks, as has happened so far in 2016 – I get the double pleasure of seeing my net worth dwindle and feeling I should have done something clever to prevent it.

Fun!

Not really – and yet another reason why it’s better you invest passively and to get on with the rest of your life.

/spurious speculation begins/

For what it’s worth though I do not think this is 2008. The US market could and perhaps should come off another 10%-20% given the extent of its overvaluation, but I personally do not see the systemic risks, the economic slowdown, any euphoria, or a global overvaluation in equities that might precipitate a worldwide slump from here.

Still, it could happen. As I said earlier, crashes are normal. If anything it’s weird the US went so long without one.

But understand they don’t all end in capitalism-threatening heart attacks.

To be sure, there are ominous signs. I keep hearing US commentators claiming their economy is safe because unemployment is still falling, for example, but jobs are a lagging indicator.

Low US unemployment actually makes me nervous!

The yield curve still looks okay – which is to say it still slopes upwards. But it has been flattening, and this will only get worse if the Federal Reserve does hike US interest rates four times this year, as was expected. (I think it won’t).

What about commodities?

The prevailing view now is that low commodity prices may be signalling something ominous.

But personally I doubt it.

To me commodities remain a story of oversupply. In the case of oil and some metals, we even know who is deliberately oversupplying the market and why. Add in years of widespread expansion, and it is abundantly clear there’s too much digging and drilling going on.

But I do not see the collapse in demand.

On the contrary I would not be surprised to see low energy and material prices eventually spark a boom in places like India and even China.

One thing that is a bit more worrying is the state of the high-yield market in the US, as I think we’ve discussed before.

Essentially too much money was lent too freely to too many shale drillers at ridiculously cheap rates.

That is now about to come home to roost. However I think the big banks are generally more than capable of taking it.

Another thing I’d note is I’m seeing a bit of strange pricing in some parts of the market. It’s not riddled with strange anomalies like in late 2008, but I believe there is some rapid de-correlation going on.

Such divergence could indicate a market falling apart – or just maybe it’s a sign of capitulation.

Finally, the rolling nature of this market rout has given active investors plenty of opportunity to take cover in cheaper stocks.

Just don’t expect them to feel comfortable!

Since late 2015 for instance I have had more natural resource exposure than ever before in my investing career. True, it’s held on a short leash and I trade it often, but I do think it’s likely to prove a better investment on a five-year view than the supposedly safe household goods giants on high P/Es.

We’ll see!

/end of spurious speculation/

Nothing has changed

So this is a bit of a brain dump on the state of the market in 2016.

I won’t be doing it every week – even if the market keeps falling – you’ll be pleased to hear.

If you do want more comment in a month or three, perhaps just come back and read this post again. I doubt anything much will have changed except the prices.

Overall, my suggestion to most would definitely be to keep investing passively, be glad that shares are on sale, follow my co-blogger’s excellent passive investing posts, and just keep on keeping on.

This is not the time to panic, not least because it’s probably a bit too late to panic for the typical UK investor who will have a home-biased portfolio.

If you’re more actively inclined, there may still be time to react to what I suspect is an ongoing regime change in market leadership. Personally, I suspect the era of large cap growth dominance may well have run its course for now.

But to be frank, even for active investors the odds suggest you’re best off buying and holding quality companies for the long-term – or at least for as long as they’re still doing good business – rather than trying to dance around too much.

Bon courage, or at least bonne chance!

From the blogs

Making good use of the things that we find…

Passive investing

Active investing

  • Short-term luck versus long-term skill – Jim O’Shaughnessy
  • Macro is hard [Or: Whither the commodity super-cycle?]A.W.O.C.S.
  • Assessing active share and fund returns – Vanguard
  • Lessons on shorting stocks from Jim Chanos – 25iq
  • When algorithms go awry – Richard Beddard
  • A deep dive into forecasting and portfolio construction [Geeky!]R.A.

Other articles

Product of the week: ThisIsMoney has reviewed the vast range of cashback credit cards on the market. You can make £100 by spending through American Express’ Platinum Cashback Everyday card in the first three months. But something like the Santander 123 Credit Card is probably better for long-term use.

Mainstream media money

Some links are Google search results – in PC/desktop view these enable you to click through to read the piece without being a paid subscriber of that site.3

Passive investing

  • Alan Roth: Why I’m buying falling stocks – AARP
  • Active management enriches the finance industry at your expense – Slate
  • It might be best to blend factor/return premium ETFs – Morningstar

Active investing

  • Private equity funds are not worth the fees (or risks) – ETF.com
  • High-flyers are leaving hedge funds to go back to banks – Bloomberg
  • Is the debut of US drama Billions a contrary indicator? – Bloomberg

A word from the brokers

Other stuff worth reading

  • Stocks for the long run? – The Economist
  • Edwina Currie: Young should spend less and save more – Telegraph
  • Pension perks for high earners set to be abolished [Search result]FT
  • New smartphone apps for splitting the bill – The Guardian
  • Regional house price rises since 1995 vary from 80% to 935% – The Guardian
  • Landlord housing wealth eclipses homeowners with mortgages [S.R.]FT
  • Is the PM right that £10,000 is enough for a typical deposit? – Telegraph
  • The dubious logic of stock market circuit breakers – The New Yorker

Book of the week: It’s been a while since we’ve had so much crash talk. If you’re new to investing or you just want a refresher I’d recommend J.K. Galbraith’s eternally readable The Great Crash 1929. There is nothing new under the investing sun.

Like these links? Subscribe to get them every week!

  1. That is, shares and other securities. []
  2. I’m not saying the Chinese economy isn’t significant, but its market has boomed and crashed out of sync with ours many times. The volatility it causes seems to be short-term. Also, it’s not even clear the Chinese market is a particularly good indicator on the direction of Chinese economic travel, let alone global stock markets. []
  3. Note some articles can only be accessed through the search results if you’re using PC/desktop view (from mobile/tablet view they bring up the firewall/subscription page). To circumvent, switch your mobile browser to use the desktop view. On Chrome for Android: press the menu button followed by “Request Desktop Site”. []

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{ 41 comments… add one }
  • 1 Gregory January 16, 2016, 2:48 pm

    Bear markets make people nervous and desperate so guarantee the equity premium. This is so simple: no pain no gain.

  • 2 Mathmo January 16, 2016, 4:31 pm

    Crash! Woot let’s go shopping!

    But then I check my spreadsheet and the “rebalance” cells haven’t turned red. (I use a threshold of 25% rel / 10% abs). So nothing to do, despite my cravings to buy FTSE near 5800.

    When others are greedy or fearful, just stick to the plan.

    I would summarise the posts but that seems to be done… 😉

    Suffice to say, loving the comments section (EnglishRose vs the pension system) on the main FT piece on flat pension reliefs. Noone mentions NI ever in these things. And so leave neary 26% tax unconsidered. Foolish in my view!

  • 3 Mr Zombie January 16, 2016, 4:44 pm

    –> “However actually investing regularly, rebalancing, and having the discipline to adjust your allocations based on your stage of life, not on scary newspaper headlines – that can be hard.” I had to fight urges this week, not to pile some cash into some tracker to ‘pick up some bargains’. If things carry on as they are I might rebalance into equity. But that’s a different thing, than trying to jump in when I’m speculating it’s getting cheap!

    –> “Another thing I’d note is I’m seeing a bit of strange pricing in some parts of the market. It’s not riddled with strange anomalies like in late 2008, but I believe there is some rapid de-correlation going on” any further reading on this?

    Some of the articles (and headlines) in the general press the past week have been amazing, fear-mongering and click bait at is best (worst?).

    Thanks for the quality links (the Seawright link is very good too)

    Mr Z

    PS – Thank you for the mention!

  • 4 Neverland January 16, 2016, 5:01 pm

    Doesn’t feel like much of a correction

  • 5 The Investor January 16, 2016, 5:18 pm

    @Neverland — As you like. The FTSE 100 is off nearly 20% and your favourite emerging markets are off 30-60%, though I guess you took a lot of that pain years ago when you told everyone to sell out of the US and Europe and load up on EMs at their height, if I recall correctly (and I do! 🙂 )

  • 6 The Investor January 16, 2016, 5:28 pm

    @All — Incidentally, if my response to Neverland’s comment seems disproportionate, please understand that for about the past 4-5 years he has chipped in with a brief comment contradicting whatever I’ve just written on (it feels like) 75% of my posts. Typically the first comment, which is especially heartening straight after you’ve published something that you’ve been working on for a few hours. Some days it gets to me more than others. 🙂

  • 7 Financial Samurai January 16, 2016, 5:30 pm

    It’s been a nice doozy YTD. Real estate is the next asset class to fall. It’s only a matter of time.

    Save up!

  • 8 Innovator January 16, 2016, 6:19 pm

    Financial Samurai, why do you say that, your website is one of the reasons I’m buying a flat! The latest stock market falls just confirm the British public’s view that real estate is the only safe investment and the money will continue to pile in, it will end in tears eventually I’m sure, but I think we are some way from that still! The Bank will never raise rates if there is a housing decline, and with fixed mortgages below 1.5%, even property with 4% yield is still cheap. I wouldn’t be surprised to see Help To Buy go to 100pc mortgages either to help prop up the market.

  • 9 Steve January 16, 2016, 6:35 pm

    There was a post on TMF a few days ago that gave a link to a Harry Dent Youtube interview and it did seem to make sense, especially his comments about the impact of the demographic changes, baby boomers etc, and how people would be spending less. But what he failed to mention was the increasing population and middle class in Asia. So I’m quietly optimistic, but at the same time, I think that consumerism is a double edged sword. We all consume too much, increasing population is not good for our planet or us and I’d like to see our leaders with the balls to confront these issues.

    Steve

  • 10 david January 16, 2016, 7:35 pm

    Lifestrategy 60/40 investors smugly smile into their Earl Grey as they watch Zero Hedge and Reddit commentors go ballistic over standard volatility.

  • 11 Edmund Blackadder January 16, 2016, 8:21 pm

    I don’t know what it is, but other than being irritated by the fickle and short term nature of humans, i’m embracing this whole correction/bear market milarkey. I’m almost at the stage of wanting the FTSE to hit 5,000 so I can plough in.

    But that would probably be silly.

  • 12 Learner January 16, 2016, 11:14 pm

    As someone all in cash, this is pleasing. On the other hand the GBP/USD slide is killing me.

    Don’t think property is going to do anything dramatic. At worst it remains static (in the SE anyway) while wages gradually rise.

  • 13 The Rhino January 17, 2016, 2:59 am

    Haha Neverland I think you should take that one on the chin! Busted!

  • 14 Neverland January 17, 2016, 12:03 pm

    @ Investor

    I have a pretty much 50:50 bond equity mix in my portfolio

    The equity portion doesn’t have any Uk home bias

    The value is down about 5% from all time peak – it isn’t actually a brown pants moment like 1987, 2003 or 2008

    My point, such as there is one, is that this “correction” is pretty restricted to a few sectors of a few markets

    Mostly it’s just an evaporation of the pre year end rally that happens every year to fatten up fund managers performance statistics

    Reactions in the big markets is pretty subdued – the big markets being the US stock markets and the US-European government bond markets

    And yes I will probably be sticking my ISA investment into emerging markets again this year

  • 15 The Investor January 17, 2016, 12:41 pm

    @Neverland — While I would still question the value of a one-line throwaway comment to anyone, I wouldn’t have had such a problem with “doesn’t feel like much of a correction *in my own portfolio*”. The fact is the markets have been roiled over the past 12 months (or 3-4 years in the case of emerging markets). It’s semantics to say they haven’t.

    Shall we say there was no crash in 2008 because markets are well up from their 1973 levels?

    I know you’re not timing the market with your EM ISA buys, but anyway I happen to agree this is probably a great time to be adding exposure to such regions.

    @MrZombie — I have no reading I can point to on that, there are just things you notice (the technicians call them ‘internals’ I’m a bit ashamed to know) when you’re an investing junkie. 🙂

    @steve — We’re of a similar mind. I personally believe the emerging market growth story in Asia, Africa and Latin America can easily power global growth for decades to come, if we can get past the environmental collapse risk: http://monevator.com/environmental-degradation-and-wealth/

    @all — It’s always good to see people relatively sanguine in the face of market declines. 🙂 But I would caution a Monty Python-esque “Call that a bear market? In my day share prices went negative! My mum had to sell the cat just to keep our holding in BP from hitting -32p” type macho-ness can eventually blow-up for some. A 50% decline (say) is far tougher than a 10% decline.

    Another issue is time horizon / net wealth invested versus expected future savings.

    If you’re 25 and your portfolio to-date is 20% of your annual income, an almighty crash is a Christmas present come 12 months early! 🙂

    If you’re 60 and you had 80% in equities, and they fall 50%… not so much. (Remember markets can and sometimes do stay down for decades.)

    Anyway, just a reminder that we’re all commenting from different places / life perspectives. 🙂

  • 16 SemiPassive January 17, 2016, 12:41 pm

    Thanks for another thoughtful piece, the time to sell stocks would have been April 2015 in any case, its a bit closing the stable door after the horse has bolted now.
    Although projecting how I’d feel if they dropped another 20-30% is a useful exercise in deciding on asset allocation for rebalancing this year, and going forward. Even if it feels annoyingly like selling out of stocks as they have got cheaper to buy into historically expensive bonds.

    The FT article on axing of pension perks for higher earners seems close to genuine sources. I am much more confident that any changes will be phased in over at least a year or two to give HMRC, pension administrators, wealth managers and the software and other IT guys behind it all time to implement the changes.
    Yes, the CofE will take a hit on people maxing out their pension contributions in 2016/17 resulting in less revenue, but any effort to spring something into effect from 6th April just won’t give all of the above people time to implement it.

  • 17 magneto January 17, 2016, 1:13 pm

    “I know you’re not timing the market with your EM ISA buys, but anyway I happen to agree this is probably a great time to be adding exposure to such regions. ” The Investor

    There are some tasty double digit discounts on EM and Asia/Pacific Investment Trusts at present !!!
    On top of hammered NAVs!!!
    Market Timers : please note can’t guarantee this is the bottom!!!

  • 18 oldie January 17, 2016, 1:26 pm

    It can be tempting to increase equities/funds in a market downturn as currently being experienced. (Now or later?)
    Is there a general strategy that fits with passive investing. For example… just top up existing holdings and stick to the portfolio. Or look at largest markets falls. Or take a long term view and if that is Emerging markets, or whatever, then just add to it?

    Thanks for any views.

  • 19 LadsDad January 17, 2016, 2:12 pm

    @ SemiPassive – having attended a CofE school, I was initially curious how the Church of England would take a hit…!

    I agree though, I doubt my employer could implement the change within a 2 or 3 months, therefore hopefully there’ll be an extra year of higher tax relief (keeping everything crossed)

  • 20 The Investor January 17, 2016, 2:12 pm

    @oldie — As a passive investor you’d usually not try to make such judgements. 🙂 Just wait for your periodic rebalancing and something like it will happen automatically. Put “rebalancing” into the search box top right for lots of previous articles on this. 🙂

  • 21 Gregory January 17, 2016, 4:11 pm

    @The Investor — “It’s always good to see people relatively sanguine in the face of market declines. 🙂 But I would caution a Monty Python-esque “Call that a bear market? In my day share prices went negative! My mum had to sell the cat just to keep our holding in BP from hitting -32p” type macho-ness can eventually blow-up for some. A 50% decline (say) is far tougher than a 10% decline.”
    Never forget: https://www.youtube.com/watch?v=CZR2k5c_198 🙂

  • 22 Neverland January 17, 2016, 4:16 pm

    @Investor

    “”Shall we say there was no crash in 2008 because markets were well up from there 1973 levels”

    It’s a central principle of the cult of long term equity investment that market crashes don’t matter because over the long term equities will always recover to higher levels because of average long term returns

    Personally I am pretty sanguine about markets reverting to average return rates probably, while noting there have been several 30 year periods when UK and US markets only generated 3-4% per annum

  • 23 Minikins January 17, 2016, 9:05 pm

    Thanks, TI. You’ve captured a mood in your post of a wizened acceptance of a long awaited storm. Despite your having a few haystacks out there, there’s enough optimism here to give courage to those with just one or two.
    I liked the TEA link too. I found a good ‘prepare for the bear’ summary here which might be of interest to some.
    http://www.marketwatch.com/story/22-things-you-should-know-about-bear-markets-2015-08-05
    Interestingly, I had a conversation with a Mexican economist yesterday who thinks this new run will be the longest ever: 30 years!!

  • 24 Financial Samurai January 18, 2016, 12:57 am

    @Innovator – Is mine? I’m honored. Don’t get me wrong. I love real estate for the utility it provides plus the potential for capital appreciation and rental income, but re investors would be foolish to think RE can continue to reach record highs with the markets and economies collapsing.

    You might get a great deal soon!

  • 25 helfordpirate January 18, 2016, 11:27 am

    Like @mathmo my 60/40 portfolio with 20% rebalance limits is still shouting at me to “do nothing”! So that’s what I will do.

    That said I have a tax rebate coming to my SIPP which will be dutifully invested in commodities and emerging markets. When April comes and I shift money from taxable to ISA I will bring some asset classes back into their 5% tolerance zones – principally UK Large Cap.

    But I agree with @TI it is dangerous to be too complacent. I remember the last two big falls well and it is gut-wrenching stuff. This time I am much closer to de-accumulation so I know I will it be much harder if it comes.

  • 26 Kraggash January 18, 2016, 12:17 pm

    Cheap imports from China held inflation low during the last boom. This meant interests rates were held too low, the boom continued too long and ultimately caused the credit crunch and (European/USA) recession.

    During thus recession, China kept growing, which and was praised as being the engine of global growth while USA struggled. However, the continued boom in China meant that commodity prices, which usually fall in recessions, were kep high. This meant that the USA/Europe slump continued longer (low prices being one of the seeds of the next boom). Only now, with China slowing, do we see the falling prices of commodities and natural resources that will be needed for the next boom.

    In other words, as China and USA/Europe economic cycles were out of sync, China extended both our Boom and our Bust.

    I think the next boom, fuelled by both low commodity/NR prices and cheap China imports (again keeping inflation down) may be ‘interesting’.

  • 27 magneto January 18, 2016, 1:04 pm

    @oldie
    “Is there a general strategy that fits with passive investing. For example… just top up existing holdings and stick to the portfolio. Or look at largest markets falls. Or take a long term view and if that is Emerging markets, or whatever, then just add to it?”

    One conservative tactical option which might be of interest with multiple holdings, in a (prolonged) bear market; is as indicated to simply top up the individual holdings to their previous values; I.E. Constant Value Formula Plan.
    However do first check out the worst case scenario, and run the calculations to ensure the investor has sufficient cash or short term bonds to hand: so that the investor never runs out of sufficient cash/bonds, no matter what happens to stocks. This safety first rider is absolutely essential!!!

    Would also add there is no need for hurry!!!
    Momentum can be the enemy of too frequent rebalancing.!!!

    Interesting and Uncertain Times.

  • 28 Mathmo January 18, 2016, 1:07 pm

    @helfordpirate — I’m getting the twitches this morning as VUKE broke through 26. I might take-up smoking as it seems to have fewer cravings.

    I ensure that all the incoming cash goes in as cash, is entered into the rebalance sheet and then if the cells go red I buy, despite my temptation to invest it immediately and fill in the little holes in the allocation. Otherwise I find that my “just grab one more bargain” mentality means that I am always overexposed and under-cashed.

    Which is the other reason that those cells aren’t turning red.

  • 29 magneto January 18, 2016, 4:33 pm

    @mathmo
    ” I’m getting the twitches this morning as VUKE broke through 26.”

    Yes VUKE is taking a pasting.
    While we hold VUKE, it runs alongside MIDD and Investment Trusts such as CTY and HSL.
    Can’t get overly enthusiastic about the FTSE100 at present as it looks so much like a rag-bag of potential dividend cutters. Maybe a little steerage from ITs for UK exposure can’t do much too harm in this instance, run alongside the trackers of course!
    Looking for a further fall in VUKE of about 5% before topping up again (will then be down 10% since last buy).
    But what a dreadful long term performance from the FTSE100 since Dec 99 when it peaked at 6930!

    Maybe it’s day will come. But how? Here’s hoping.
    How do you see things?

  • 30 Grand January 18, 2016, 4:50 pm

    As brilliant as always TI, it’s been an interesting few months, every so often I’ll have a smart ass comment hurled my way about how bad the markets are and whether investing in Stocks and Bonds was the right idea (I have tried to share as much knowledge as I can as I’ve learnt it over the last few years with my colleagues). Market’s have been falling left right and centre and instead of panicking I’ve said to myself hope things are still this bad come pay day. . . I wonder if in another 2 decades I’ll feel this way?

  • 31 helfordpirate January 18, 2016, 5:00 pm

    @mathmo @magneto
    If you think VUKE is bad, try VFEM or worse CRB (Lyxor Commodities Index)! At least the 10%-ish appreciation of the $ has lessened the pain on non-UK assets.

    I have bought into these as new money has reached a de minimis (set to make the trading cost insignificant) but it has been like catching the proverbial falling knife. At least my blended cost per share is slowly going down!

    This is what 40% high quality bonds is for – and index linkers continue to defy gravity! Probably one of my best performing asset classes last five years despite the long duration and impending rate rise.

  • 32 The Investor January 18, 2016, 5:16 pm

    At least the 10%-ish appreciation of the $ has lessened the pain on non-UK assets.

    Just a reminder that the denomination of the fund doesn’t matter, it’s what currencies the underlying assets are valued in that matters.

    I don’t know exactly what those are in the case of the emerging markets tracker VFEM* or how they’ve fared (the factsheet may say?) but given how I keep reading how emerging market currencies have suffered relative to the US Dollar, I doubt that they’ve added much to your sterling returns.

    See this article for a fuller explanation (the comments might be useful, too).

    http://monevator.com/currency-risk-fund-denomination/

    *This is assuming VFEM is not hedged to all those underlying currencies. The factsheet should say, but from memory it’s not.

    @Grand — Well who knows? Even if markets go down for the next five years, that’s another five years of added savings. The important thing to remember is to eventually de-risk as your time horizon eventually runs out (assuming you haven’t discovered the elixir of youth along the way! 🙂 )

  • 33 magneto January 18, 2016, 5:55 pm

    @helford pirate
    “and index linkers continue to defy gravity! Probably one of my best performing asset classes last five years despite the long duration and impending rate rise”

    Last time looked at INXG (Index Linked Gilts ETF), duration was 21.53 years, which is frightening. Dist Yield 2.02% – ??? = real?

    To try to reduce overall bond duration have included IS15 (Short IG Corps ETF), now that we are allowed to include short bonds in our ISAs.
    Duration 2.48 years. Yield 2.93% – infl = real.

    Have now ended up with a kind of ‘barbell’. Not necessarily a good thing!
    Problem : How to get some intermediates into bond portfolio?
    Intermediate Gilts real yields IMHO leave something to be desired, and volatility remains.
    Intermediate IG Corps also quite volatile, and end up with credit risk as well as interest rate risk.

    Thank goodness for cash!

  • 34 helfordpirate January 18, 2016, 6:29 pm

    @TI. Sorry. You are quite right of course with VFEM. In fact most of the rest of equity portfolio is Vanguard Dev ex-UK which does have a big slug of USD assets.

    @Magneto. I too have a bar-bell of IGLS and IS15 on the short side.

    The distribution yield of INXG is an odd one! That is the actual cash paid out last 12 months relative to NAV and is much higher than the distributions of say the Vanguard and L&G funds which are close to 0. They explained to me in an email that the cash distribution “includes the fund managers estimate of the future capital gains amortized to maturity”. That way the actual yield is close to the weighted YTM. All the other index linked funds seem to just distribute the actual coupons and so yield next to nothing (in terms of actual distributions).

    Does anyone thoroughly understand yield of bond funds (as opposed to individual b0nds)?

  • 35 Jim Wang January 19, 2016, 1:58 am

    Slow and steady wins the race, it just doesn’t spark the headlines. I wouldn’t say I love bear markets but after the last few years of increases, it does feel like the market was due.

    I was talking to my mom, who is nearing 60, and she’d been diligently saving in her 401k every year. She was telling me that her 401k, now pulled back away from equities because of her age, was 50% higher than a colleague who, as she described it, likes to “play the market.” (same contribution rate) He got out sometime during the Great Recession and has yet to get back in. I immediately thought of that when I saw your picture of “when do I get back in?”

    Slow and steady… and a long time horizon.

  • 36 Mathmo January 19, 2016, 1:12 pm

    @helfordpirate, @magneto

    Just to clarify, my twitches at VUKE are buy cravings: about whether I should mortgage the firstborn to buy more.

    I’d have thought anyone holding bonds would have cashed the lot in by now and let go of that balloon to fill their boots with equities. I have no bonds.

    Or maybe — just maybe — stick to the allocations… 😉

  • 37 theFIREstarter January 21, 2016, 8:11 am

    Great to hear your thoughts on all of the above TI.

    As a fairly young investor I am welcoming the drop, but am wary of chucking too much cash into it all, in case of further significant drops and as you say it could stay low for years for all I know.

    BTW – A word of warning to people on your “But something like the Santander 123 Credit Card is probably better for long-term use.” line…

    I did a calculation on the Amex Platinum vs Santander credit card and personally think the Santander one is pretty rubbish in comparison. The reason being they cap the amount of cashback you can earn while still charging a monthly or yearly charge (can’t remember how much but there was definitely a charge) so I would be doing well to just about cover that charge.

    With the Amex you pay £25 a year but the earnings are uncapped, I normally make about £100 per year off of it so it easily covers the charge and you don’t have to remember to use it for certain areas of spending (like tesco, petrol, etc…) you can just use it for everything and have done with it.

    Cheers!

  • 38 vanguardfan January 21, 2016, 12:21 pm

    @mathmo
    I have bonds, and I have to say right now is the time I am most appreciating that, and haven’t felt less like selling them!

    @TI and all – this current volatility is the first really significant decline I’ve experienced since properly starting investing, and I’m realising a few things. One, that I’m glad I finally committed a personal investment statement to paper a few months ago; and two, that I wished I had been able to pin down a few more specifics in it. I’m becoming aware that I don’t have really clear rebalancing criteria, and even my asset allocation bands are pretty broad. A written investment statement is something the Bogleheads forum pushes a lot, but here at monevator I’m not sure I’ve seen any discussion about it. Worth a post perhaps? I wonder if there is any evidence that writing down your intentions helps investors overcome the well known emotional biases that lead to the tendency to sell low, buy high.

  • 39 Jaygti January 21, 2016, 12:40 pm

    Re. The Santander credit card, be aware that the lower cap on cash back only applies to new account holders.
    If you already have one, the limit is staying the same as before, although the fee is still increasing.

    As the firestarter says it’s probably not worth getting now, but it might be worth keeping if you already use it.

  • 40 Planting Acorns January 21, 2016, 4:24 pm

    @Jaygti

    I rang them asking to leave the 123 card and they put 16 months interest free on purchases… I now have c.9k on the card and the exact same earning me (very little) interest elsewhere…

    Worth a ten minute phone call ?

  • 41 Jaygti January 22, 2016, 8:32 am

    @ planting acorns.

    That’s a good idea, I might try that this weekend. Thanks.

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