There is going to be market carnage! What will you do?

Monday, Jun 11 2018 by

We are heading towards a very painful market crash, there are few things of which I am more certain.

The trouble is that I have no idea whether it will be next week, next month, next year or next decade. I also have no idea how far the market may rise in the meantime nor how many ‘wobbles’ we may experience before the big event.

But I can be sure there will be a major meltdown sometime ,it is what markets do. At this point we will see the anointment of a new batch of economic gurus who “told us so” (irrespective of how long before they had been telling us so!)

This leads me to ponder (in part of course because I am nervous  that such an event might not be that far off) – What should I do about it?

For those investing “for the long term”, the answer might be :

Do Nothing

The underlying basis of this position is that over the long run the stock market is just such a great place to be invested that rather than risk value judgements about “short term” swings, the best bet is just to remain in the market.

This is not without merits, and indeed some of the things I found while researching this article sway me a little more towards this view than I had expected.

After all; if one had held the FTSE All share from its pre-2008 crash high point of 3,479 ( 15-Jun-07) through to the end of May this year [4,222] you would have seen a 21% increase in value (despite being down 50% in March-2009). This represents a CAGR over nearly 11 years of 1.8%, add maybe 2% pa to that for dividends, whilst that is a pretty meagre return, it is far short of being a disastrous melt-down   during such an ‘exceptionally’  turbulent period.

Except that may this period was not so exceptional after all. I recently read an article in the mainstream press  encouraging ordinary Joes and Josephines  to consider investing in the stock market. It contained a couple of comforting statistics (I cannot validate how they were calculated) from long term analysis of the market :

  • Over any 10 year period there is a 90% chance that investing in the market outperforms “cash”.
  • Over any 18 year period this chance rises to 99%.

Personally I didn’t find those stats at all reassuring. A 10 year period seems quite “long term” to me and yet there is still a 1 in 10 chance that investing in the market is the wrong choice!

Even a 1% chance over 18 years – I am a keen enough believer in Murphy’s Law  to know ‘for sure’ that this 1% freak occurrence will happen at exactly the point at which I can least afford it.

At this point, I need to call out what I regard as the fallacy of the “investing for the long term” argument, which is that in the vast majority of cases investors will at some point presumably want to draw an income from their investments (and if there is a 1% change that 18 years into the future can’t be classed as long-term there is a potential problem.)

As I am personally near that point myself I have spend much time modelling what level of withdrawals might be prudent compared with my expected investment returns. If you haven’t done such an exercise I strongly recommend it -  just be sure to include an event such as the 50% market fall we saw between June-07 and March-09 and see how your plans fall to ruin as you are forced to sell near the bottom to liberate your income stream.

Of course there are ways to deploy your capital to lessen those impacts; such as  keeping  ‘X’ month/years of your  fund in cash and not topping up that cash buffer during a downturn;  but those approaches are not certain and the safer you make them (by increasing ‘X’) the lower your overall returns.

Anyway just to round off for now on the ‘do nothing’ approach, aside from being based on the idea that the stock market is such a great place to invest that you do not want to be out of it, it is also predicated on the view that markets spend more time (and distance) going up than going down ( cue articles citing the impact of being ‘out of the market ‘ for the 1% of best days over  history.)

This perpetuates the idea that market crashes are rare freak events. The facts tell me a different story.

The ‘Normalcy’ of crashes.

I have reviewed performance of the FSTE All Share    over the period October 1986 to the present. Mostly because this is the period for which I have available data, but also as it is a period for which I have some personal recollection. (Although to be fair, as a bit of a student radical back in the day, my recollections of 1987’s Black Monday do not include a major concern for the impacts on Investors)

Here is a chart of the performance over the period including the five ‘crashes’ (which I have defined as a 20%+ fall from peak to trough) over that period.


And here are some stats on these crashes.


There are many ways you can interpret this information and I will mostly leave readers to draw their own conclusions, but there are a few things I just wanted to highlight over the period :

  • The trend has been downwards from a peak towards a trough for 20% of the time.
  • For over 50%of the time the price has been below the previous peak (and this only covers the specific peaks that I have covered.)
  • It has taken the market on average 40 months (and 6 ½ years at the longest) to recover to its former  highs.
  • The elapse time from a market low to the next market high (preceding a fall) has ranged from 1 year 9 months (Dec-87 – Sep-89) to nearly eight years (Sep-90 to Jul-98) averaging just shy of 4 years.
  • We are currently over nine years past the market low in March-09.

As I note on the chart there was a fall of 18% between  April-15 and Feb-16 and this is excluded solely because I set my trigger point (arbitrarily) at 20%.

I point this out for three reasons :

  1. If I had set slightly less rigorous definitions of a crash, then my stats above would have made crashes seem even more like the ‘norm’
  2. The idea that we are in a near 10 year uninterrupted bull market is not wholly true.
  3. The 18% 2015/2016 fall is not too dissimilar from the 21% fall 1989/90 and crucially because it occurred after the inception of StockRanks there may be some tentative lessons we can learn.

So whilst there is much that one could attempt to infer from this chart, for me the big take-away is that significant periodic corrections are very much part of the investment landscape and much more so than I see reflected in most writing on investment topics.

 If you do not have a plan of how to deal with them you put yourself at risk; for my part I have tended in the past to muddle through’ with what I have thought to be adequate results; but with the benefit of hindsight I believe I could have performed much better with a more structured approach.

If you want a broader view on market corrections there is an interesting (but I suspect incomplete) summary on Wikipedia here

So back to the original theme ,

What can one do?

I will actually deal with the options more briefly than I originally intended as  I want to cover my original hypothesis together with an interesting twist that came from my research.

I would, however, be particularly interested in readers’ views on what their approach to such events are.

In short though there are a number of themes as I see it :

Do Nothing – I have already covered this above, and whilst it is not a disastrous approach, I do feel that it is risky and can be improved upon.

Monitor the markets and the economy and respond accordingly.

I suspect that many market participants would answer something along these lines and whilst it is creditable not be to be locked into a fixed set of rules that may not be applicable to a given circumstance, I think that it can (in some cases) simply translate to “actually I don’t have a plan”, so I prefer to focus on more tangible positions.

Reduce my exposure when the market looks ‘toppy’. 

Just from casual observation I have seen a lot of evidence of this being a common approach. Over the last two+ years I have seen a lot of comments that people have a significantly more of their investment pot in "cash” than they would on average.

Not being fully invested at market highs has two clear benefits : (1) The “cash” element of your savings will not go down in the crash and (2) it gives you some firepower to hoover up bargains at the bottom of the market.

I do not think though that most of us can reliably identify the market ‘tops’ and ‘bottoms’ and there is a substantial risk of selling low and/or buying high.

The FTAS is up around 24% since June-16 (around 2x the longer term average rate of increase) , so that is quite an  opportunity cost for those that have taken funds out of the market for fear that we are near a correction.

Essentially this approach involves, to some degree predicting , the crash in advance. I’m not personally comfortable that I have any skills or ‘edge’ to do this effectively.

Deploy sector  rotation to be in the best performing sectors.

There is quite a lot written about sector rotation, such as this piece (web search ‘sector rotation’ for much more content).

But I have two challenges with this approach :

1 – For all of the pontificating I have not seen an objective evidence that it actually produces superior results.

2 – Maybe I’m just dumb, but I’m afraid that it is only through the rear-view mirror that I can accurately determine which market phase we were actually in at a given point in time. (In my mind it is akin to being able to predict the crash as noted above).

Similarly the idea that one should be in “higher quality” stocks before a crash has the same challenge of understanding when we are “before” the crash, and if you knew that with any certainty – wouldn’t you sell everything?

Adjust your balance between ‘asset’ classes dependent on the level of the market

This is similar I think to “reduce exposure when the market looks toppy” and I believe has similar weaknesses, however it is worth some comment.

In his excellent  book “The Intelligent Investor” I recall that Benjamin Graham refers to adjusting his allocation between stocks and bonds dependent on whether the stock market looked expensive or not.

I do not, however, recall him citing any evidences as to whether this produced good results or not.

In any case, I suspect that quantitative easing will have severely disrupted any counter-cyclical relationship that may have existed between Stocks and Bonds.

I have no expertise in other “asset classes”, so cannot really go there.

The only one where  I can see obvious potential would be Gold. Unfortunately I have an ‘intellectual block’ on buying Gold, I cannot shake myself from the belief that it is the longest and most powerful ‘bubble’ in the history of mankind. I should probably discard this prejudice, given that Alchemists (or despite my training I would have to contend AlPhysicists)  are more likely to have success than the ‘bubble’ popping for any other reason.

I just cannot buy Gold though – again my adherence to Murhpy’s law tells me that the day I did would be the day the world wakes up to the true productive value of it.

React to the market top – Sell near the top and Buy back near the bottom.

Excellent idea, in theory.

This is broadly what I did in 2007-2009 (probably missing out on c. 50% of the losses I would have incurred through simple buy and hold).

In hindsight though I cannot help but feel that some of my calls at the time were more luck than judgement (I have no aversion to be lucky, so long as I can consistently achieve it.)

I am also pretty sure that had I followed that approach earlier this year, when the FTAS fell 11% from 4,269 (12-Jan) to 3,811 (26-Mar) I would have probably sold near that low and finally have become convinced of the ‘false signal’ by the time the market rose back above its previous high by May. Ouch!

So whilst I of course reserve the right to change my mind on a whim, I do not think this approach is for me.


Pick a diversified set of “good” stocks to minimise the impact of any downturns.

Firstly I should say that obviously the stats I have presented refer to “the market” (as represented by the FTAS). The mere fact that you are reading articles here suggests that you aspire to beat the market; but even if you can consistently beat the market by say 5% pa , those downturns are too big to ignore.

The bigger question is, whether by selecting a good portfolio of shares you can protect yourself from major market corrections as well as overperforming in the good times.

My gut feel answer to this was (and in fact still is to a large degree)  that this is unlikely to be sufficient to fully insulate you from the vagaries of the market – market meltdowns tend to appear pretty indiscriminate. However, I’ll show tentative evidence below that slightly tempers this view.


Become (permanently) ‘market neutral’ by hedging your portfolio of ‘long’ with a portfolio of ‘shorts’

At this point I have to make a confession  - This was the thrust of the article I thought I was going to write, so much so that the original working title for the article was the slightly cheesy “In praise of Topiary”  (Topiary – Hedges – Geddit? Oh never mind).

And whilst this is still a major plank of the approach I am taking to prepare for armageddon , there is an equally (if not more) interesting outcome from digging into this that I will come on to.

The hypothesis was essentially built on data from the relative performance of StockRank [QVM] groupings over time as shown here

[I should just point out here that I show annually rebalanced figures  - they show the least positive outcome for SR performance, but are more practical in terms of avoiding the costs of over-trading]

  Over the last five years ‘good’ stocks (SR > 80) have consistently outperformed ‘poor’ stocks (SR <20). Respectively these groups have achieved CAGRs of +16% vs – 7%

Whilst this past performance is obviously no guarantee of future and indeed creating actual portfolios may produce worse (or better) performance, if this rough level of performance differential can be achieved It could allow positive performance in rising markets and very strong insulation against market downturns.

Now clearly there are many challenges, risks and costs (not to mention possible adaptations) to such an approach, but I float this an idea, rather than wishing to discuss the practicalities in detail here (except to say that I do not believe it is thoroughly impractical).

One of the clear costs though is performance dilution : if  you can make 16% pa just by going long then why would you compromise on making ‘only’ 11% pa for a hedged portfolio? Because the sun doesn’t always shine. If I could chose my profile of investment returns over the next five years, I would chose (+10%, +10% , +10%, +10%, +10%) over (+35%,+35%,+35%,+35%, -50%) every time (despite deliberately choosing the second set as having a marginally higher CAGR)

 But how effective is the hedging?

  Of course this is untested in the major crashes that I outlined at the top of this piece.

However we can perhaps tentatively learn something from 18% fall in 2015/16.

From 10-Apr-15 to 12-Feb-16 the FTAS fell by 18%.

Over the same period :

  • SRs 80-100 fell by only 3%
  • SRS 0-20 fell by 20%.

One up for the hedging!

Over that period, being “long” the market would have lost you 18%, being hedged would have seen a gain of 8.5% ((+20% -3%)/2). In fact the relative out-performance of the top SRs vs the bottom was stronger than the long run average.

But did you spot the surprise result, that slightly adjusted my thinking?

The performance variance was nowhere near evenly distributed either side of the market;  the low SR stocks performed only marginally worse than the market, but the high SR stocks (in aggregate) hardly fell at all over this period . So this might give some support to the idea that an high SR portfolio offers some degree of insulation against wider market crashes.

However, it would be highly incautious to extrapolate too far  - an 18% market fall is, in my opinion, a very different beast to a 50% meltdown and I would still expect the latter to be much more indiscriminate.

So there we have it despite that slightly unexpected result (by me at least) -  that again seems  to provide evidence as to the strength of high  StockRanks – my primary chosen tool to protect against the next downturn is to become increasingly market neutral by hedging my Long positions (not all selected on the basis of high SRs I should point out) with a basket of 'poor' (I was going to say basket case, but apparently I have a tendency to be too corny) stocks.

I started the process early this year and it is still work in progress. So far I am pleased to report that thus far my ‘Long positions’ are in aggregate up and my ‘Short positions’ are in aggregate down.

So far, so good and already (even though the balancing is not complete) I feel more 'chilled' about whether or not the market is "Toppy".

 So what are everyone else’s ‘big plans’ to cope with the next 'market crisis'?


As per our Terms of Use, Stockopedia is a financial news & data site, discussion forum and content aggregator. Our site should be used for educational & informational purposes only. We do not provide investment advice, recommendations or views as to whether an investment or strategy is suited to the investment needs of a specific individual. You should make your own decisions and seek independent professional advice before doing so. The author may own shares in any companies discussed, all opinions are his/her own & are general/impersonal. Remember: Shares can go down as well as up. Past performance is not a guide to future performance & investors may not get back the amount invested.

Do you like this Post?
30 thumbs up
0 thumbs down
Share this post with friends

21 Posts on this Thread show/hide all

Gromley 11th Jun 2 of 21

True IGPJ - for those still regularly investing out of earned income - market crashes are a 'mixed curse' - your new money coming into the market each month is picking up better and better (long term) bargains, whilst your original capital is getting (at least temporarily) eroded.

So there is still a case to see if you can better protect your existing capital (unless it is small relative to your ongoing contributions) and maybe if you think you can "time the market" you might also think about holding on to your regular contributions until such time as "the bottom is in".

And at some point in the future you'll still find yourself in the position of taking out rather putting in, so may have to tackle the issue eventually.

| Link | Share
john2 11th Jun 3 of 21

The performance of the 'do nothing' option would be considerably improved in the most serious recessions by applying rigorously implemented rolling stop losses - personally I always sell a share that falls more than 20% below the highest price that it has attained during the period in which I have held it. In the case of a 48% market drop this would decrease your losses by a large amount, while allowing you to continue holding high-quality stocks which have not declined to the same extent. I continued to hold Compass (CPG) throughout the 2007 to 2009 recession, while selling many of my other holdings.

Of course, this begs the question of deciding when to start reinvesting your cash.

| Link | Share
jonesj 11th Jun 4 of 21

Keeping investing regularly is an obvious solution for anyone with years of working ahead of them.

~However, anyone who is nearing retirement has to consider they cannot carry on saving, so a different mindset is required.

Also, it's fairly common to have a 10~15% drawdown within any calendar year. The JPM Guide to The Markets documents show this clearly. So if the market is, say, down 15%, we don't actually know if that's a short term dip providing the buying opportunity for the year, or if there is another 30% drop to go. So selling isn't easy.

The one thing I do hope to do is increase the percentage of cash when valuations are high.

| Link | Share
pka 11th Jun 5 of 21

Hi john2,

You wrote: The performance of the 'do nothing' option would be considerably improved in the most serious recessions by applying rigorously implemented rolling stop losses - personally I always sell a share that falls more than 20% below the highest price that it has attained during the period in which I have held it. In the case of a 48% market drop this would decrease your losses by a large amount, while allowing you to continue holding high-quality stocks which have not declined to the same extent. I continued to hold Compass (CPG) throughout the 2007 to 2009 recession, while selling many of my other holdings."

I agree that this is a good strategy for most bear markets. However, it won't always work. For example, with hindsight it would have been the wrong thing to do after the 1987 Crash, in which the market fell about 23% in two days but gradually recovered over the following year.

| Link | Share | 1 reply
john2 11th Jun 6 of 21

In reply to post #372589

There are no absolute rules in investing - it's a matter of playing the percentages. However I'm sure that in the 1987 crash some shares did decline by more than 20% from their high points, while others never did.

As you say, there was a recovery over the following year - the difficult question to which I have no answer is deciding when (and in which shares) to reinvest.

| Link | Share | 1 reply
Gromley 11th Jun 7 of 21

In reply to post #372599

A good point john2, I should have added stop losses into my list of options - as they take some of (often flawed) judgement out of the process. Also they are "evergreen" in that they can be useful in bull markets as well as bear markets so you do not need to second guess which market phase we are in.

I was though going to make the same point as pka that whilst they would clearly have saved money in the c. 50% downturns, they could easily have cost you in some of the lesser crashes.

I know that some people swear by them and whilst I don't want to engage in some of the pantomime style arguments I have seen on the subject I would just say that whenever I have attempted to model (i.e. backtest) their use, whatever level I choose, they seem to stop you out near "the bottom" far more often than they actually save you.

I probably need to upgrade my datasets (or gain access to more comprehensive ones) to do more rigorous testing; in part though I suppose it depends what 'type' of stocks you are looking at and what you do with the saved 80% (in the case of a 20% stop) - my observations have been that many stocks bounce and stick above the trigger level and therefore I tend to see them as failures, but in fact if they recover by less than your alternative investments they may still in fact be successful.

Anyway - thanks for the suggestion - it really should be in the list of options and I'll certainly include it in any follow up.

| Link | Share
pka 11th Jun 8 of 21

One approach to this problem is to have a portfolio that is not entirely in equities, so that if there is a major bear market in equities that part of the portfolio which is not in equities will hopefully retain most of its value. That works particularly well if there is likely to be a negative correlation between falling equities and the other asset(s) in the portfolio. The traditional diversifiers in the past have been bonds, either government or corporate. However, many people are questioning whether now is a good time to hold bonds, as interest rates are so low at present and are likely to go up in the future, which would mean the capital value of bonds may fall, particularly if the bonds are long-dated. So some people are using other asset classes to bonds as their diversifiers, as discussed in this FT article:

My own approach in recent years, for better or worse, has been to aim to have about 60% of my portfolio in equities and 40% in multi-asset investment trusts and funds, rebalancing my portfolio annually towards this target allocation. This means I am leaving the choice of diversifying assets to the managers of those funds, which I do because I don't think I would be good at making those decisions for myself. I reckon about 30% of the 40% in multi-asset funds is in equities, so the overall equity proportion of my portfolio is about 72%, which some might argue is still an aggressive asset allocation. However, I plan to combine this with a stop-loss approach similar to the one suggested above by john2, which I hope will reduce the losses in my portfolio in the next major bear market compared with what they would be otherwise, although there's always a risk that a stop-loss approach might make things worse.

| Link | Share
PhilH 12th Jun 9 of 21

The term 'crash' is quite interesting in this context. Some of the declines must be the most slow motion car crashes ever. For example the 2000 decline of 48% took 30 months.

Personally this chart is what I'll be using to decide whether to exit long positions (or at least tighten my trailing stop losses at the very least)


It's an Ichimoku cloud chart of the the S&P 500 Index from 1998 (the earliest Stockopedia can offer) to date. The signal I'm looking for is the blue line (lagging line or Chikou) breaking below the cloud (Kumo) and setting two consecutive lower lows below the cloud. The lagging line is the closing price projected backwards on the chart by 26 periods. If you look at the dates you've highlighted in the original post this would have taken you out of the market at key points. Here are some examples ...

In August 2000 the lagging line breaks below the cloud and this corresponds to the drop in price in Feb 2001. Closing long positions in Feb 2001 would have saved a lot of pain.

In September 2007 the lagging line set two lows below the cloud corresponding to new lows in late Feb 2008. Again closing long positions at this point would have protected against significant losses.

In July 2015 the lagging line set two lows below the cloud corresponding to close prices in January 2016. The bearish trend wasn't as severe or as long lived but still you wouldn't have known that at the point it occurred.

So for me Sell/short on chikou (blue lagging line) making a convincing break below the cloud

Timing when to re-enter the market is harder.

Option 1: Buy back in once chikou breaks above the cloud (potential to miss strong rally particularly after a strong bear decline)

Option 2: Buy back in once the Tenkan Sen (orange fast Moving average) cuts up through the Kijun Sen (red slow Moving Average)

Option 2 might give some false positives though such as June 2001,  November 2001 & December 2002. 

Perhaps option 3 is Buy back in once the Tenkan Sen (orange fast Moving average) cuts up through the Kijun Sen (red slow Moving Average) AND Kijun Sen trends up (which might occur some time after the crossover.

Anyway, that's my strategy and I'm not overly concerned about flash crashes. They happen and there will be little or nothing that anyone will be able to do about them. It comes with the territory.

Best of luck

Professional Services: Sunflower Counselling
| Link | Share
RadioactiveMan 12th Jun 10 of 21

Hi Gromley,

I have only been investing full time for about a year and have not witnessed any major crashes, but, like you I live in fear that one day soon the market will teach me a few lessons. Your article was much more comprehensive and well thought out than my simple brain has comprehended but I'll sum up my thoughts anyway.

As I read in the naked trader, academic research found the key to 'super performance' did not come from finding the best stocks but by avoiding the huge drops when the market fell. With this in mind I think any trader or investor should be looking to exit positions if the market looks set to crash. The difficultly with this is telling the difference between a 10% 'correction' and a 50% crash as occurred at the start of this year.

The obvious course of action is to move money into cash as your degree of certainty of a crash increases, especially with illiquid small cap stocks. On top of this stops should be set on all positions to protect against your own emotional biases and indecision.

The problem that I am anticipating with moving money into cash is decision fatigue. Closing positions is stressful with so may 'what-ifs' running through your head especially if the market is plummeting around you. Also as my investment strategy has evolved I have ended up with more positions that I would like. Closing a couple of these will be easy but the stress of doing so will increase as I work through my portfolio. This will inevitably lead to a lack of clarity about what the market is doing and my own positions. Therefore I am in the process of reviewing all may positions including updating stops, setting TPs and cutting my lower conviction positions so that if a crash occurs I can act with a high degree of certainty.

| Link | Share
aflash 12th Jun 11 of 21

There have been several threads on the topic over the past two years.
One of the best ones is here:

Read the whole lot especially comments by Allan Collins

| Link | Share
iwright7 12th Jun 12 of 21


It's worth considering valuation in relation to downside risk. See above bar charts of max downside v.s valuation, split into Quintiles.  - Moral in a downturn: Sell high priced stocks (Low V Score) and buy again?

| Link | Share
pka 12th Jun 13 of 21

The American bloggers Meb Faber and Gary Antonacci discuss some interesting strategies on their respective web sites for reducing portfolio drawdowns in bear markets, by using various combinations of multi-asset portfolios, trend following, stop-losses and/or absolute and relative momentum:

However I suspect that many Stockopedia subscribers have portfolios that are mainly in equities and cash rather than in a wide range of assets. But I think one could still use some elements of Faber and Antonacci's approaches together with a mainly equity portfolio and get some benefit from them in reducing drawdowns in bear markets.

| Link | Share | 1 reply
whitmad 12th Jun 14 of 21

The way I look at it, if tomorrow the value of my portfolio fell by 50%, I'm still left with a lot more than I would have if it had all been in cash or gilts or t-bonds or some other "safe" asset over the last five years,

I'm retired now, living off the returns, and can adapt lifestyle according to how good those are. If things go badly I'll tighten my belt, if they go well I'll have nice holidays.

I take measures to reduce risk: no debt, no leverage, stick to high quality companies,. But in the end, it's a bumpy road, learn to live with it,

| Link | Share
ls2g08 12th Jun 15 of 21

I have been consciously de-risking my portfolio slightly, by buying more financially strong companies and culling the weaker ones from my portfolio.

My basic rules are that they have to have positive net tangible assets, a low or negative accrual ratio and a decent current ratio. I allow a few companies to break one of these checks - if it makes sense for their business model, (i.e. a software company - most of the value is intangible so often have a negative NTAV) but then they must have a higher current ratio. I also try to ensure the business is growing profits and sales.

| Link | Share
andrewdb 12th Jun 16 of 21

The core assumption of this place is that rules-based investing (high SR etc) works

The question here is that when the whole market falls compared to something else (cash!), what do you do?

Answer : take a rules based approach!

In parallel with Gromley, I have been predicting a house price crash since 2006. One day I will be right.

If you are living on the dividend income, as long as the dividends do not fall, you should not care about a 20% + fall.
There are other options like senior secured corporate debt ( which are reported to have outperformed equity since 1999 (disclosure, I am a minor holder and admit that is a rather 'interesting' choice of start date) but nevertheless tells me that if I don't get 8% over a long period, perhaps I should do something else.

I tend to not use leverage on stocks as the costs and spreads seem to be high and I lost money. Not rational, but early experiences are formative. I do on occasion long/short the FTSE.

I take a (sort of) rules based approach.
Take the ASX, and the yield on the ASX (
4254 and 3.4 prospective as at time of writing.
The ASX is worth the present value of its future dividends
(*very subjective bit*) the factor I use is 28.573 - in use since Jan 17.
4254 * .034 * 28.573 = 4132.68

so I think the market is ~ 2% overvalued.
(you could have another long thread of what to do if you think the market is just a bit over/under valued.
i take the view that there is a lot of noise)

When there is a big divergence - over 5-10% - , either the interest rates the market is basing it's decisions on have changed - or the market will change.

The indicator as a 'go short' signal worked in 87, 00, 07, 11, April 15 and jan 18 (and also gave false positives at other times)

Others may have different and better rules.

| Link | Share
dangersimpson 12th Jun 17 of 21

Saying you are certain of something is always a dangerous thing in investing! That said certain valuations do look very toppy - particularly in the US market & large cap growth.

Effective ways to reduce draw-downs are:

1. As already mentioned trend following. There is a reason that this is not always effective and it is the psychological cost of implementation. There will be time when you get 'whipsawed' i.e. sell out only to see the market move higher again. You have to be prepared to then buy in again at a level higher than you sold if the trend reverses.

2. Buying Puts - these are historically quite cheap because volatility is also low. If you don't want to do this direct then Meb Faber (Cambria Funds) have a tail risk ETF that does this: You would expect this strategy to take small losses in the good times and pay out in the bad times.

3. Focus on cashflow positive companies with strong balance sheets at reasonable multiples. There is no guarantee that these won't suffer in a market crash but they are unlikely to go bust or need to come to the market for cash and see your holding diluted at the worst time. They may even prosper as they can take out weaker competitors or you re-invest dividends at good prices. Again though this is psychologically hard to do and you need to be able to ignore everyone making hay in the large cap growth stocks while the sun is shining.

So there are no easy solutions to this dilemma however it should be possible to provide some draw-down protection without just going to cash if you have the psychological strength to stick with a consistent strategy.

| Link | Share
Lawman 12th Jun 18 of 21

An important context is where you are in your investment career. If you have over 20 years to go, and will continue to make regular contributions (new money) you can be equanimous. I am now retired, so no new money. I shall make a few draw downs, but seek to preserve capital for my heirs: so a medium term approach.

A rough test is: 'Which deal would you take - A where there could be a 30% gain or 30% loss, or B where there could be a 15% gain or 15% loss?' In my circumstances it is B.

As such I allocate half the total to mainstream equities, and half to 'cautious' assets.

The difficulty is what is 'cautious'? Not standard bonds which are now correlated with equities. I hold wealth preservation funds (PNL, CGT, RICA etc), short duration bonds, infrastructure and recently increasing cash.

There is no simple answer, but this excellent article makes it clear that you should assess the risk and take such action as your individual circumstances require.

| Link | Share
Carey Blunt 12th Jun 19 of 21

In reply to post #372824

Following on from pka's comment above. Meb Faber recently interviewed James Montier on his podcast (search for the Meb Faber show on any podcast software). Episode 107.

They discuss this topic and James gives a run down of 4 options and his personal favorite which he calls "do nothing" but is different from the do nothing you talk about here, he actually means to get into cash and sit it out.
His arguments are quite persuasive. I recommend listening to it.

| Link | Share | 1 reply
pka 13th Jun 20 of 21

In reply to post #373139

Hi Carey,

Thanks for your suggestion to listen to the Meb Faber interview of James Montier. As I can read more quickly than people speak, I read a transcript of that interview on this web page:

Montier's "do nothing" approach seems to be a recommendation to convert all of one's portfolio to cash, based on his assessment that the US stock market is poor value in historic terms at present, and wait until the next bear market has made stocks better value before buying them again. That's unlikely to be an approach that will appeal to many people on a stock-picking website such as Stockopedia. Furthermore, price-earnings ratios in the UK stock market are much lower on average than in the US one, probably due to worries about Brexit, so perhaps his recommendation to be fully in cash at present would not apply in the case of UK stocks.

| Link | Share
Zoiberg 14th Jun 21 of 21

I'm in cash. We have bubbles in both the bond and stock markets. Although timing is difficult as Mr Market is an irrational person, something is going to make him panic. The air is laden with petrol fumes and although I can't say where the spark will come from, come it will.
I'm drawing up a list of possible triggers - an obvious one is the EU announcing 'rebalancing' tariffs in July.
Two observations:
1. Gold went down in parallel with the market in 2008/9.
2. A return to previous levels after a fall of 50% is a rise of 100%.

| Link | Share

What's your view on this thread? Log In to Comment Now

You can track all @StockoChat comments via Twitter

Stock Picking Tutorial Centre

Let’s get you setup so you get the most out of our service
Done, Let's add some stocks
Brilliant - You've created a folio! Now let's add some stocks to it.

  • Apple (AAPL)

  • Shell (RDSA)

  • Twitter (TWTR)

  • Volkswagon AG (VOK)

  • McDonalds (MCD)

  • Vodafone (VOD)

  • Barratt Homes (BDEV)

  • Microsoft (MSFT)

  • Tesco (TSCO)
Save and show me my analysis