Stock rank portfolios in a bear market

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17th Feb '17 by ratinahat001

5 comments 5869 reads

Does any one have any predictions about how well a stock rank portfolio that is currently successful would behave in a bear market? Assume the usual NAPS rules, but with quarterly rebalancing.
The reason I ask is that I am considering moving a significant part of my portfolio which is currently under a buy and hold strategy to a stock ranks strategy. As I keep thinking that the current stock market highs cannot be sustained for much longer, I wonder if I may have missed the boat - if only I had done it 4 years ago!

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Ratinahat001

Premium Member

5 comments

Ken Lowes

17th Feb '17

I will guarantee that we are going to have a bear market but it could be next week or next year or even the year after that. Either way wouldn't you be better off doing the research first, most of the information you need is on the site, make your decision based upon low debt, quality earnings, quality product and reasonable size companies that are likely to recover quickly when the bear market is over. The best place to start would be with your existing portfolio it might not be as bad as you think.
Good Luck
Ken

Edward Croft

17th Feb '17

StockRank portfolios will do just as badly as the overall market in a bear market. That's the nature of equities. I'd argue that StockRank portfolios could even correct faster and harder given the momentum loading.

There are a few ways to minimise downside risks in equities, but they all have costs.

Owning more low-volatility / low-beta shares - these tend to fall less than the overall market. I'd argue that these kinds of stocks should be the bedrock of any portfolio - to create a conservative foundation. We're actually in the process of developing Risk/Volatility ratings to make selecting these kinds of shares easier.
Hedging is one way, but it's like taking out insurance... you pay a premium for safety. There are lots of research papers about when to do this.
Stop losses - again these are a form of individual position insurance and can minimise big losses. The trouble is that most people get stopped out and don't repurchase... so stop loss portfolios in practice often underperform.

It's always difficult to get started in the stock market. There never seems to be a good time. I was super-nervous back in 2013 when we launched the StockRanks... I was convinced we'd missed the boat then !

HumourMe

17th Feb '17

In the back tested portfolios, those I've examined with low beta, have attractive draw down features. A composite risk/volatility measure would be very interesting. My understanding is that 'value' attempts to do this using fundamentals, 'quality' using sound accounts and eps growth. This screen combines low beta with value and a nod to quality http://www.stockopedia.com/screens/winning-growth-...

Adding low beta, at selection, assures us that any price change is unlinked to the market, however, if the market is climbing and your share has high (short term) beta/ positive RS, then once on the move high beta is desirable (in a rising market). As the price climbs the downside protection is eroded by higher prices and risk increases, offset by positive momentum.

When you have the measure it may be very interesting to consider it as a as a shorting (selling) indicator.

Edited for comprehensibility.

ratinahat001

17th Feb '17

Ed,

Thank you for taking the time to reply to my post - I appreciate your comments, especially about momentum and the importance of owning more low beta shares.

The majority of my holdings are relatively conservative defensive stocks - based on the momentum issue I will continue to hold a large portion of these, so overall risk to me won't be too bad.

One thing I learnt through being unsuccessful with a fantasy fund was the importance of timing w.r.t. starting a new strategy. When I started the fund, on day one I went 100% invested. I made a massive loss. With real money, I have therefore just bought 2 holdings per month until fully invested, with quarterly reviews and it has worked out much, much better. This approach will reduce my stress levels a bit and reduce the impact of a bear market on the portfolio.

One other post that you wrote was also relevant to my queries and helped a lot was http://www.stockopedia.com/content/stockranks-return-over-100-in-4-years-how-have-you-got-on-171469/?comment=28#28

Greg.

Ken Lowes

18th Feb '17

That's a thumbs up from me Ed thanks.

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Stock rank portfolios in a bear market

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Ratinahat001

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