Plans for an eventual bear market?

16th Sep '17 by Logic

63 comments 18266 reads

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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Howard Marx

16th Sep '17

I'd agree with gus's observation - when markets go down, everything will go down - value, growth, small, large, high quality, low quality, low risk, high risk, high momentum, low momentum.

Sure some factors will decline more severely than others, but it will be little consolation if the market drops 20% to be 'only' down 15%. Take a look at the performance by factor in the last bear market of 2008 (US stocks, Russell 3000):

So for me the the choice is binary:

switch to cash &/or
take out an index hedge (via one of the CFD providers)

iwright7

Howard,

Interesting table - Quality and Low Vol did better in the 2008 cash and annualized, so tempting to combine the two in troubled times. I am in 40% cash at the moment and waiting to see what Q4 brings.

Ramridge

The scary part of the North Korean missile tests is that they have twice launched missiles flying over Japan, once on 29 Aug and the second yesterday on 15 Sept.
It only requires one missile to be faulty (after all these are test flights, aren't they?) and for it to land on Japanese soil in a built-up area.
The probability of such an event is not trivial.

JohnEustace

Re North Korea, Ken Fisher in the FT today is saying we should ignore it. It's very unlikely to lead to conflict and if it does then regional conflicts don't damage stock markets. He does say he doesn't mean to be callous as he has South Korean family himself.
I'm not so sure about the regional conflict not being damaging. The historical precedents he quotes are pre globalisation and the creation of the intricate globally connected supply chains that we rely on today, especially in the tech industries. Try running Apple without Samsung supplies for example.
But on the whole I think I agree with him. It's a binary outcome that markets can't accurately price. We should either carry on or sell up completely, there isn't really a middle ground.

Personally I am following Minervini on this issue. His strategy is to go 100% cash when things look really bad to around 50% when dark clouds loom as of now. So he was near 100% cash earlier this year, but now I believe he is still only 50% invested.
He claims his strategy has helped him ride out all previous (recent) stock market crashes with little if any damage. It is simple, intuitive and one for me. Currently I am only invested in six shares and hold 67% cash.

Rusty2

I'm doing:

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.

Also I have bought some gold. I have diversified into Europe, if it's just a UK problem then makes sense to invest in other markets. Bought some larger cap. income shares. About 1/3 cash now could go 50% next week.

AnonymousUser252054

NK has been mentioned. I think Trump could significantly ease the worsening situation by simply withdrawing US troops - but he can't as an already hostile media would destroy him for doing so. Countries often seem to end up at war for similar bad reasons. I thought his election victory was a good thing and we would see an end to US militarism, after all he wouldn't want Trump Tower turned to dust if WWIII finally happened.

jonno

A difficult call; at some point the markets will turn but when is anyone's guess. With the exception of ITV, which I think is undervalued, my portfolio consist of small caps, many of which are on single digit PEs and cash positive or lowly geared. Currently I have a short position on the FTSE to about 10% of my portfolio and do not intend to open any new positons. I shall also take profits on those holdings in which I have less conviction, taking cash to about 30% That is the plan; as to how successful it will be remains to be seen.

I agree with Gus and Howard that when the market goes down it will take all with it, some to a greater extent than others.

ricky65

17th Sep '17

"everything will go down"

Begbies Traynor (LON:BEG) went up during the 08 crisis.

topvest

yes, agreed. This is the best counter-cyclical share I can think of by some margin.

vik2001

18th Sep '17

im around 60% cash and 40% invested.we all know you cant guess the markets the bull run could go on for another year or two, who knows? its to draining trying to guess the market, so go with the flow. if I see anything good im still going to invest if it looks like a opportunity, but not with a great amount, as I still want to hold more cash.
if the markets drop im going to be buying, drip feeding my money back in and trying to scoop things up.

Mark Simpson

geared short ETF position

Geared ETF's are typically a very bad deal for the buyers. Because of the way they re-balance daily then volatility adds significant extra costs. Since in any crisis you are likely to get increased volatility then you could lose money on the position even if you get the market reaction to a crisis you want to protect from!

It may be better to consider buying put options which are historically cheap at the moment due to low volatility. Buying a small amount of put options each month for the longest available month could act more like the downside insurance policy you are after in that increased volatility due to a crisis will increase the value of the put combined with any increase in value due to index falls. You are still paying a time premium for this exposure but at least market falls & increased volatility would be pulling in the same direction for you.

AnonymousUser858

I suffered substantial losses when the tech crash came and again when the financial crisis happened. Since then I have been determined to dodge the next bullet(s) even if that means missing opportunities. I find it hard work to recover from major losses and acceptable to endure periods of poor returns. I went into cash when there was a market wobble a few years ago and then again before the referendum and yet again before the recent general election. I have missed some opportunities by doing so but have also dodged a number of falls. I currently feel uncomfortable with the markets and the general outlook therefor and am still 65% in cash. I am actively researching ideas for long term strategic investments which ought to come good eventually even if there are market wobbles. Some of these ideas are in sectors that might benefit from the conditions that accompany recession. More of that anon.

Bottom line for me is that I want/need a 6% return. I am doing better than that at the moment whilst having 65% in cash and earning very little. That allows me to limp along until the weather clears up.

cig

My plan is to wait and see. During a crash, there's usually a bunch of small caps that get deeply distressed, that is go down much more than large caps, so the idea is to swap some of my core boring blue chips for distressed small caps when that happens.

Besides I don't think we're in an equity bull market. The equity premium is below or close to historical norm. Nominal share prices look "bullish" but that's just in so far as they incorporate secular, and possibly permanent, changes to the risk free rate.

JamesrWilson1989

Mine would be A.

I've never been invested during a massive downturn so this is only my theory and emotions might get the better of me. However, my situation is that:

- I invest the max into my ISA every year, and I'm 28 years old. My strategy for my investment is to build it into a decent chunk so I can retire early, or obtain financial independence as quickly as I can so I can have freedom in my life/no money worries. So you could say I'll be in the markets for another 20 years+, without the need to spend a penny of it beforehand. I have minimal debts (apart from a manageable mortgage)
- I dip the current limit, £20,000, fairly evenly throughout the year, and with the max cap in place, means I wouldnt invest in any big lump sum. Some years, I'll invest just before a massive crash, other years I'll be buying right at the bottom.
- When I'm invested, I have circa 25 stocks, high ranking, diversify as much as I can.

Nobody knows when a market crashes, could be this afternoon, could be a year's down the line. You also have to think about the missed returns you'll face waiting on the sidelines.

aflash

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, or alternatively in bonds?

All of the above but it needs some refinement.

Here are some comments:

B) I made more money in a week by using inverse, leveraged (2 and 3 x 1) ETFs shorting at the end of 2008 than most of that year. The best gains were Short the Financials and Short the Russel. I started when it was about to happen but stopped too early, not catching all the move. I was then slow to invest in 2009 and cut a reflation position in the Financials which went on to do very well.

All of this compensated for the huge paper losses on the Pound Sterling portfolio v the US Dollar and all the holdings I had kept. These reversed over the next 7 years until Brexit.

I continued using inverse, non leveraged (1x1), ETFs the next few years with notably success at the end of 2011. These are fairly harmless, the index or sector you short can rise or fall 10-20% and you lose approximately the same amount. Since 2008 the ones on China and Oil have produced the best returns for me in both directions Short and Long.

C) Always! Cash is an Asset (one of my mantras).

Bonds, especially now, are Dangerous and present a real chance of Capital Loss.

Another of my mantras is Never Buy for Income. The capital loss can be so much larger. I do, however, and always prefer a dividend paying stock. Of course the results are poor.

All of this Defensive Investing came about being shaken by the 1987 crash. The Tech crash passed me by because I had learned to build up large cash cushions. From 2003 I was investing up until 2006-2007 then started selling.

The present Bull run has been exceptionally long. In February 2016 I thought it was the signal and sold on the bounce. Wrong. Brexit was a great opportunity but I did not put enough into US dollar earners. Trump's win I thought it was another signal. Wrong. So all my non leveraged (1x1), ETFs are either showing a loss or have been sold for little gain.

Since May 2017 I take profits and losses quickly and remain Cash heavy.

Bulletin boards are busy. Amateurs are trying out the Stock Market.

This Time, however, it IS Different. I challenge anyone to predict Accurately which asset class, sector or country is the most vulnerable. For example Gold did nothing in 2008, despite the Experts. It did a lot in 2011. Remember Peak Oil? Remember the Japanese Wall of Money?

When will the next Bear market start? Ask me After it has started. Then, however, be ready to turn on a dime and Give Up your Pet Theory. (Note to myself!)

TangoDoc

A downturn is in the wind so I have already sold 30% of my entire portfolio that were sitting on as much as 28% profit and had looked as if they were beginning to slow at least and some to fall. I could have realised more had I done this a week earlier but even now, I can see those same stocks continuing to drift lower so that seems to vindicate my decision. Some of those stocks, being in the construction industry could be considered as bellwethers. The rest of my portfolio is continuing to rise but I am keeping a close eye and will also sell if I see the same tailing off trend.
Now my concentration is on sectors that hold well under stress and I am looking most particularly at those companies that did best this time last year when sentiment also briefly changed. However, I am slightly in favour of staying in cash as it would not be ridiculous to anticipate a spending spree in November and December once the party conference season has produced its damaging effect and that has gone away. It would not surprise me if the next three months saw major political changes, any one of which can mess with the market.

Nick Ray

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.

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.

Zoiberg

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.

Plans for an eventual bear market?

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Logic

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