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Weekend reading: Shares fell. It’s what shares do.

Weekend reading: Shares fell. It’s what shares do. post image

Good reads from around the Web.

Finally, a bit of volatility in the markets after all that tedious upward marching, and we are reminded why equities are about risk as well reward.

As blogger Josh Brown put it in the midst of the volatility:


At least the 10%-ish correction has given pundits a chance to dust down their brace position mantras. I’ve selected a few below.

Most are aimed at active investors. There are rarely enough passive articles for me to squander any here – but you can find some relevant links in the Passive sections as usual.

That said, much of this stuff is behavioural, and it applies to everyone.

My advice to true passive investors would be to stick to your allocations, and ignore the movements until you come to your next scheduled rebalance.

(Oh, and remember when people were asking The Accumulator why he held around 40% in government bonds in his model portfolio, and how could he be satisfied with that supposedly dreary 6% annualized gain? This is a reminder.)

Some thoughts on the falling market

The market falls mean UK shares look pretty cheap by the CAPE measure, reports ThisIsMoney:

The current UK market CAPE ratio stands at 14 for what is broadly the equivalent of the FTSE All-Share using the data from Thomson Datastream.

That compares favourably to a long-run average of 19.6, although it stands someway above the 11.4 it hit at the bottom of the market slump in 2009.

..and UK Value Investor uses the same yardstick to question how much further the FTSE 100 could credibly drop:

At 5,000 the FTSE 100’s CAPE would be 10.

If it fell to 4,000 then its CAPE would be 8 and at 3,500 its CAPE would be 7.

To give you something to compare those numbers to, in 2009, when the FTSE 100 stood at 3,500 and everybody thought the financial world was about to end, the market’s CAPE was 9.5.

So assuming the CAPE approach is correct, for the FTSE 100 to reach 5,000 investors would need to be as pessimistic as they were when we were days, or even hours, from a global financial collapse.

Currently that seems a little unlikely.

Remember that that the “E” in CAPE can fall as well as the “P” – i.e. earnings would probably fall in a big global slowdown – although CAPE does smooth this out to some extent.

But for now the world is hardly ending, reports Alan Roth at AARP:

Stick to an asset allocation you can live with. Decide what proportion of your portfolio should be in stocks and stick to it, irrespective of the headlines.

The implications are simple: You have to buy stocks when they plunge and sell when they surge.

Simple? Yes. Easy? No.

The Eight at Eight blog has some less pithy and more poetic advice that might be worth reading if you’re young and not used to volatility:

Surviving isn’t a frozen moment in time, but is in fact a continuous effort to maintain equilibrium in your mindset and in your investment approach no matter what the market conditions are. A constant reminding to yourself of the end goal as an investor. A retaining of beliefs in yourself, your methods and investment decisions.

While the similarly colourful Wexboy begins his wide-ranging recap by pointing out how trivially we shout “Fire!” nowadays:

Traditionally, a 10% market reversal was defined as a correction, while a bear market was at least a 20% decline.

But now the business media’s upped the ante, unilaterally adopting something like 3% & 10% as the new thresholds

Perhaps that’s why Patrick O’Shaughnessy at Millenial Invest is already having flashbacks from the last war:

Markets are, at their core, about emotions and how you handle them.

It is so easy to be brave from a safe distance, to say that you will be cool when the tough times come.

During 2008-09, I learned that that is naïve bullsh*t.

Those were terrifying times. I was worried to my core about my family’s future, the business, and all of our clients who had trusted us with their money.  I convinced some to stay the course, but failed more often than I succeeded.

But the truth is we’re a long way from 2008 today. We’re not even in 2012 territory.

I enjoyed these articles, but I do think the sheer volume of words – of which the articles above are just a smidgeon – in response to what’s been a modest if swift correction so far tells us more about how gentle things have been than anything much about the future.

Stay sane out there.

From the blogs

Making good use of the things that we find…

Passive investing

  • Dealing with volatility – Rick Ferri
  • Dividends are more reliable than accounts – Maven CP

Active investing

Other articles

Product of the week: Sainsbury’s Bank is now offering personal loans of up to £35,000 reports The Guardian, way above the usual £25,000 ceiling. It’ll charge 6.9% over five years. Remember that debt is awful stuff, so only use for heart surgery or similar.

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.1

Passive investing

Active investing

  • Buffett’s stock pickers are beating the market – Fortune
  • Improving the odds in active management – MorningStar
  • Sharing the fruits of my portfolio [Search result]John Lee / FT
  • Is quality cheap? – MorningStar
  • On that note: The 10 most profitable UK companies – ThisIsMoney
  • Related: How Terry Smith picks winning shares [Video]Telegraph
  • Very few funds are overweight the FTSE 100 – Investment Week

Other stuff worth reading

Book of the week: Obsessed with the plunging stock market? I know that dark attraction, which is why I have been trying to work on my aquariums this week. Alternately relaxing and stressful, and you have living things to care for which matter much more than wobbles in share prices. Get inspired with Nature Aquarium by the pioneering Takashi Amano.

Like these links? Subscribe to get them every week!

  1. Reader Ken notes that: “FT 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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{ 18 comments… add one }
  • 1 Neverland October 18, 2014, 10:54 am

    It’s not even a real correction yet and everyone’s whining like chicken little saying the sky’s falling in

    People have real short memories

  • 2 magneto October 18, 2014, 11:12 am

    UK All Share Yield 3.51% (3.0 – 5.0) PE 13.38
    US S&P Yield 2.06% (1.8-3.0) PE 16.98
    The parenthesis yield figures are recent normal ranges.
    Suspect CAPE figures so widely used to highlight how expensive US stocks are these days, might be distorted by the collapse in earnings, and PE1 may unusually for once be a better guide.
    However not making any bets either way.

  • 3 The Investor October 18, 2014, 11:17 am

    I believe the Ftse did do 10%+ peak to trough intraday. CNBC kept saying the pricey US market managed 9.85%. Bigger falls in Europe though, and plenty of steep drops on individual companies this year well in excess of 10%. 🙂

  • 4 rajkanwar October 18, 2014, 12:22 pm

    Wow so FTSE is actually not over valued by this measure. I like CAPE a lot.
    I actually though it was grossly over valued but I was mixing it up with US position.
    Actually earnings might go down or not keep up with inflation as at some point of time the wages would start going up. Would be good for overall economy though which will feedback into stock prices with a lag.

  • 5 John Kingham October 18, 2014, 12:37 pm

    “tells us more about how gentle things have been than anything much about the future.”

    Spot on. Things have been very quiet for a couple of years and how quickly investors begin to see this as ‘normal’. It is, but what we’ve had this last month is normal too. But rather than cry, just think of all those lovely companies trading at low valuations and with high yields. I’d much rather be investing today than in 1999, that’s for sure.

  • 6 Rob October 18, 2014, 3:21 pm

    Market volatility deters a lot of investors. That makes it cheaper for those that can cope with a 30% fall in valuations.

  • 7 Robert October 18, 2014, 4:24 pm

    In February this year a friend told me of her 17 year old nephew making a fortune in the stock market…..

  • 8 Jim McGregor October 18, 2014, 6:05 pm

    Damn, damn, damn! I had set myself a target that when the FTSE reached 7,000 I would convert about 75% of my holdings into cash following such a great run and wait for the correction before diving back in.
    So near, and yet so far.

  • 9 Ric October 18, 2014, 9:22 pm

    I’ve been so bored recent months, sitting on my new cash. Thursday was my first buying day for months, felt good!
    I’m also happy with my existing portfolio, as none of my divis have been cut (in fact this week several holding announced increases) so my measure of my portfolio’s value is still increasing.

  • 10 WestCountryEscapee October 19, 2014, 9:36 am

    For those of us that rebalance with new contributions, it’s business as usual with the chance to pick some things up at a reduced price. It’s a good time to ask – Monevator suggested readjusting allocations once a year for the next twelve months’ payments, so the portfolio gradually drifts back towards the original asset allocation.
    However I adjust each month to rebalance back to the original allocation. Assuming dealing costs are the same in each case, what are the risk/return arguments?

  • 11 Jon October 19, 2014, 12:27 pm

    I topped up on VUKE (ftse 100 ETF), some European dividend ETFs and individual USA shares. Rolls Royce is looking appealing but unfortunately I’m already fully vested with them. I started investing 3 years ago in a serious way, so missed the previous correction. People say you wont know how you would react if stocks fell 20, 30, 40 percent – I know that I will be throwing every penny I,ve got into the stock market if that happens. Maybe The most difficult aspect is that you must have sufficient cash available.

  • 12 Luke October 19, 2014, 1:52 pm

    I am lucky enough to have a copy of Nature Aquarium gracing my shelf 🙂

    Have you ever read ‘Ecology of the planted aquarium’, by Walstad? Essential reading, even if it is a bit ‘sciency’.

  • 13 sceptic October 20, 2014, 11:06 am

    It seems to me that now is not the worst time to reduce exposure to cyclical stocks / sectors unless you believe in a (strong) recovery of the UK / European economy.

    Why do I need to own financials, industrials, commodity stocks etc. at such levels?

    Ever looked at the breakdown of the FTSE or Stoxx 600 or MSCI World?

    20% financials
    12% cyclical consumer goods
    11% industrials
    15% commodities & energy

    I personally don’t think the global economy is in good shape. However, I have no crystal ball and I do not know when the next (real) market correction will take place. It will happen, no doubt. So I rather stay invested in defensive sectors and cut out the cyclical parts.

  • 14 magneto October 20, 2014, 4:19 pm

    ” So I rather stay invested in defensive sectors and cut out the cyclical parts.”

    So how do you put that into practice?
    Individual stocks or something else?

  • 15 sceptic October 20, 2014, 6:02 pm


    Yep, however, you could also achieve this with a selection of sector ETFs tracking the MSCI or Stoxx sub-indices for Health Care, Consumer Staples etc.

    I will consider buying cyclicals or broader market trackers once we get back into 2008 or 2011 territory.

    If the market continues to go up like a straight line for the next couple of years, I will most certainly lag behind. In case of a major correction my MDD should be lower or leverage well below 1 within the equity part of the portfolio. That’s the plan. So far it works out well.

  • 16 The Investor October 20, 2014, 7:41 pm

    @Luke — Hah, great to know there’s another one of us out there! 🙂 Maybe I’ll do a post on my new Celestial Pearl Danio nano aquarium on my desk here where I’m typing someday.

    I’ve read PDFs originating from Walstad if I recall correctly — or possibly Internet takes on the ideas — and even tried some of the low-tech techniques back in the day. Worked fine, but I have to admit I missed the water moving!

  • 17 The LazyPanda October 21, 2014, 9:19 am

    We all need a reminder from time to time that markets are an unexpected, unleashed animal that does what it wants. Thanks for doing this.
    Otherwise, we might even start to believe that all the financial gurus and active investors actually know something on the market that we don’t!
    Besides, passive investment can become very boring -which can cause people to start looking for more exciting opportunities – I think a little excitement is a good thing, while meaning probably nothing in the long run.

  • 18 SemiPassive October 22, 2014, 8:36 am

    The most reassuring thing thats happened in the recent “correction” is my index linked gilt tracker ETFs have functioned as they should and gone up to cushion the losses, despite inflation being on the floor.
    Logging in to H-L was a relief rather than a shock.

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