Plans for an eventual bear market?

Saturday, Sep 16 2017 by

We are currently in a bull market. It has been a bull market for quite some time. Looking back, bull markets tend to eventually end. When this happens, by what trigger, and what course it will take, are all unclear (at least to me).

My question to you, fellow presumed investors, is how do you intend to prepare for an eventual bear market?

Do you intend to:
A) Continuously invest now and throughout any bear market.
B) Short the market when you think it will turn down/after it has started to turn down.
C) Increase the proportion of your savings that you hold cash (like Warren Buffett, although he has size constraints that individual investors do not), or alternatively in bonds?
D) Move investments into less cyclically affected shares or markets.
E) Do nothing as "this time it's different (TM)", and bear markets will never happen.

Or something else?

Please share what you intend to do, and whether you intend to do so before a bear market or if you think you will act after it begins? Also feel free to share what approach you took during the last bear market, and how that worked out.

Disclaimer: I am not saying I want a bear market to happen, I do not wish to upset anyone and I am not trying to influence anyone's financial decisions. I just want to have a nice pleasant discussion on the matter and for people to share their strategies.


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60 Posts on this Thread show/hide all

Nick Ray 18th Sep '17 21 of 60

Probably worth mentioning here the "permanent portfolio" created by Harry Browne. The idea is to put 25% into each of stocks, bonds, gold and cash and rebalance about once a year. This creates a very low volatility portfolio (the four components very rarely move in the same direction together) with modest but consistent returns. Such a portfolio weathers the highs and lows of the economic cycle, but almost by definition it will be under-performing one or more of its constituents at any given time.

I won't provide a link because a quick Google will turn up not only the basic idea but also much debate for and against this approach, so that is probably the best way to investigate further for anyone interested.

For me the interesting aspect is that it is one more vote for the general idea that controlling your volatility is a crucial factor in consistent long-term performance.

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vik2001 18th Sep '17 22 of 60

In reply to Nick Ray, post #21

I like this idea, but probably weight more into the stocks. for myself personally I wouldn't want 25% in gold. but will read more into this by HB. thanks for this.

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Zoiberg 18th Sep '17 23 of 60

In reply to gus 1065, post #3

I think China benefits from the current NK problem as it takes the focus off their territorial expansion (island building) in the South China Sea. I'm not expecting them to impose any meaningful sanctions.

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Zoiberg 18th Sep '17 24 of 60

In reply to Howard Marx, post #4

Re: table provided by Howard Marx. Just look at the bounce back by value stocks in 2009 and 2010!

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ISAallowance 18th Sep '17 25 of 60

In reply to Zoiberg, post #24

I don't think that means that holding a value portfolio through a correction is necessarily correct though. The value stocks that bounced back might have been quality stocks prior to the correction, and only become value stocks during it.

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Aislabie 18th Sep '17 26 of 60

I am reviewing my holdings on the basis of which ones can reasonably expect to come out the other side of a 3 year bear market with their business still viable. So firstly I want to stay away from those relying on debt. Secondly I want those that are well spread on a currency basis. Thirdly I am keeping 10% in silver and 25% in cash to be able to buy on cheap opportunity.
And lastly - most importantly - I am steeling myself to resist the urge to sell during the collapse.
This plan is based on the hope that, as in past crashes, "this too will pass". If the downturn looks like lasting much over 3 years then I will rely on more individual stocks with opportunities, even in downturns there are always some.

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Howard Marx 18th Sep '17 27 of 60

In reply to Zoiberg, post #24

Value stocks can have spectacular moves during & emerging from bear markets. But the aggregate performance is pedestrian unless you had good timing!

Value stocks performance (Russell 3000)

  • 2008 -45.2%
  • 2009 +91.3%
  • 2010 +33.2%

0.548*1.913*1.332 = +39.6% = 11.8% compound over three years

Not a great return when volatility adjusted.

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JohnEustace 18th Sep '17 28 of 60

In reply to aflash, post #19

"This Time, however, it IS Different. I challenge anyone to predict Accurately which asset class, sector or country is the most vulnerable. "

My answer to that challenge is Bitcoin and the other crypto currencies.

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Allan Collins 18th Sep '17 29 of 60

Good Afternoon Logic,

A really interesting question given that a lot of people think we are at something of a major crossroads in equity markets. They say "markets climb a wall of worry" and I guess any one of the bear bricks in the wall could be the trigger for a new bear market.

Bull markets end in a different way to bear markets. Bear markets tend to end with one big sell-off, a spike down - the last seller has left the building and it is over. But because we are an optimistic bunch, bull markets tend to end with a number of attempts to reach a recent peak as buyers use the dips.

That's a good thing because it gives you time to get your strategy in order, and you can see it playing out on the chart. I look for what appear to be 'failed highs' on a chart and I might well react to that kind of set-up and turn bearish. Or I might wait for a long-term average such as the 200-day moving average to turn down on an index such as the FTSE 100. The downside to waiting for that is that the index can be well off its peak by the time it happens, but a number of super stocks and high flyers may well have already given their own individual sell signal.

As far as bear market strategy is concerned, there are some shares I will hold through thick and thin - they will get marked down with everything else but their quality might make them more resilient. The majority of holdings will go however. If I do want to retain equity exposure I might rotate funds into low-beta defensive leaders.

Another part of my strategy might be to put some funds into assets that have the least correlation with equities - that could include bonds and some commodities. But the main plank of my bear market strategy would be cash - boring but it gives you big advantages if you can time your re-entry correctly. And I might make things a bit more interesting by adding a short-FTSE 100 ETF - one that has a record of doing what it says on the tin and gaining a point for every point lost on the index. If I really feel confident about a bear market trend I might gear up on that short ETF.

Hope that helps along with all the other useful posts you have received.

Allan Collins

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jonesj 18th Sep '17 30 of 60

In reply to ricky65, post #12

Begbies is my largest position in a proper company, although it ranks behind 6 Investment Trusts. It's perked up slightly since Mr Carney has been suggesting interest rates might rise.

That's as far as my hedging goes.    Maybe more sophistication is required.

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aflash 19th Sep '17 31 of 60

In reply to JohnEustace, post #28

OK, bring me up to date on that theory, please.

(The story so far: Once upon a time there were some Chinese investors who lost confidence in their banking system and were able to spirit money away via the Block Chain. However the Big Bad Regulators cracked down because they did not want their banking system to be discredited. Far away in New York Land a Ratings Agency downgraded the Bank of Communications' paper to junk status. Now the venerable HSBC holdings has a 20% stake in the Bank of Communications which means......)

Your turn

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Zoiberg 19th Sep '17 32 of 60

In reply to Howard Marx, post #27

I'm mostly in cash right now.

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johnv 19th Sep '17 33 of 60

Keep hearing that we are in a bull market since 2008, well what about the 22% downturn we had from mid2015 to early 2016 (FTSE went from 7070 to nearly 5500) what was that.

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Howard Marx 19th Sep '17 34 of 60

In reply to johnv, post #33


According to Dow Theory, bear markets/downtrends occur where "each new low is lower than the previous low and each peak is lower then the prior peak"

As can be seen below, the move in the FTSE-100 2015/16 didn't go below the low of 2012.

Hence this move would be characterised as a 'sell-off' rather than a 'bear-market'


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skyjacker 19th Sep '17 35 of 60

In reply to Howard Marx, post #27

Your formula is not quite correct, you should have

0.452*1.913*1.332= 16.7% or 5.3% CAGR

if before return wasn't great this looks even worse.

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Graham Ford 19th Sep '17 36 of 60

Many posters seem to be saying they are selling and moving substantially more into cash, so if this is representative then there is something of a self fulfilling prophecy going on.

While I haven't done calculations the idea of switching in and out between stocks and cash for the majority of the portfolio every year or two depending as much on the "mood" as anything sounds like a sure fire way to run up a lot of dealing costs and miss some of the best days for gains in the market without necessarily gaining a great deal of protection against an unforseeable event that causes a crash.

Rather than a sudden crash perhaps it is more likely that as interest rates rise gradually the markets trade sideways for a substantial period. If you have moved into cash what are you then going to do? Stay in cash making next to nothing and waiting longer and longer for a crash?

Ed Croft wrote a nice piece about 'How to play the joker' with regard to the NAPS portfolio. If I recall correctly it was basically saying that after a downturn move quickly to rebalance the portfolio into whatever has now become attractive, don't hang on to your old paradigm of which companies to own.

So perhaps a reasonable answer may be to be well diversified across asset classes, regions, market cap and sectors. At the same time hold a little gold as a store of value. And hold a bit more cash than normal ready to buy whatever becomes cheap/attractive post crash as soon as it becomes attractive (an example would possibly buying house builders soon as the Brexit referendum as that sector crashed way more than it should have).

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Monty9 19th Sep '17 37 of 60

One of the pleasures of investing for oneself is that one is responsible to nobody but oneself (and maybe family). I have tended to buy stocks I fancy and simply hold. After a while the good massively outperform the bad (held IQE since 2009) - but patience is needed. However this does mean that a recession can be extremely painful, and I think my rather too optimistic portfolio at the start of 2011 ended it about 55% down, which was a horrible waste of the 135% gain from late 2009 to end 2010.

The last couple of years have been pretty good, though not like 2010 and I have been doing five things to hold onto what has gone right:
1. sitting on cash when I choose to sell something, I'm now about 30% cash
2. looking for contrarian stocks such as BEG, which has provided a decent yield and good capital growth to date and the interest factor has hardly featured (which, when it rises, will increase Begbies' business greatly).
3. keep the best ones (sold 1/3 of my IQE holding and will run the rest for the forseeable future). I think its prospects are so strong it is likely to keep on growing against a weak market.
4. sell the dogs before their value reduces to pennies. This is my achilles heel. I sold Belgravium at exactly the wrong time before it took off (I never checked out why). I held City Fibre at a cost of a current 40% loss, despite the company doing OK it seems. I suspect I will always be rubbish at this but possibly spending more time researching the recent news will help before a) naively holding on for a few months, or equally, b) selling just before something good happens (Belgravium and nearly IQE. In the IQE case it was a presentation at Mello that helped me keep the faith in what I always believed was as quality opportunity).
5. be more cautious of the downside when seeking the upside. Decent balance sheet, profitability and even dividend yield.

That's about it - until next time I get hurt!

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aflash 19th Sep '17 38 of 60

In reply to Allan Collins, post #29

Bull markets end in a different way to bear markets. Bear markets tend to end with one big sell-off, a spike down - the last seller has left the building and it is over. But because we are an optimistic bunch, bull markets tend to end with a number of attempts to reach a recent peak as buyers use the dips.

That's a good thing because it gives you time to get your strategy in order, and you can see it playing out on the chart. I look for what appear to be 'failed highs' on a chart and I might well react to that kind of set-up and turn bearish.

This is well expressed. So many 5 year charts I look at have 'rounded tops' now. They reached a peak, found supply and demand has subsequently fallen off. I have to be careful because the price is attractive, they are back in value territory but there is no institutional volume to move them back up.

We are looking for 'rounded bottoms.' Prices have bottomed out and buyers are re-appearing. The best example at the moment is the Oil price.

Another Technical Analysis point worth bearing in mind is Support becoming Resistance.

If the definition of a Bear Market is taken as dropping more than 20% then that level also becomes significant. Look at charts of 2008 and 2001 of the FTSE All share, for example. The index dropped 20% and bounced as the optimistic bunch mentionned above tried to reach a recent peak.

It then dropped back through the 20% level and collapsed 50%.

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johnv 19th Sep '17 39 of 60

All this bear/bull talk reminds me of Investor Chronicle which kept talking about a bear market in late 94 and 95. When the market took off in may 95 onwards, they wrote a column "is it too late to join the bull market". By the way the first stock I ever bought was Division(remember them) virtual reality. LOL

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ednobbs 20th Sep '17 40 of 60

Baffled !

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