Time to Go Shopping - Global shares nosedive

Jim2007

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I always find these kind of articles amusing: Global shares nosedive on China economic woes. Especially when they are peppered with statements like these:

"Global investors are worried about growth in the world's second largest economy."

What utter nonsense! The fast majority of investors did the same thing today as they did last week and the week before - nothing! It is the dealers and the funds managers that are loosing it - these are the times when you see how little they really known.

It is all ways a good time to go shopping when the idiots are selling. They through away really good stuff without even knowing it.
 
Hi Jim

For those of us who have most of our assets in shares, it's a funny time. I am long term buy and hold, so I have no intention of selling, but it's still unsettling.

I have felt that the market has been overvalued for some time, but I know that I have no way whatsoever of measuring the valuation of the market. So the feeling has no basis in reason.

Is it a temporary panic which will correct itself in the near future ? Is it the start of a long-term reduction in the value of shares? I have really no idea. I do need to sell some shares over the next few months. I don't know whether to sell now or wait until the last minute?

I am poorer tonight than I was on Monday night last week. But overall shares have done very well over the past few years. If I had been asleep for the last year and just checked the prices tonight for the first time, I would be happy, enough. If I had been asleep for 5 years, I would wake up very happy.



Brendan
 
alot of people have set limits and stop losses which get triggered on days like today, this creates an avalanche of selling which causes the market to fall more. Stop losses are good in theory but they usually all get triggered at the same time like today. Its been a bad few weeks all round.
 
I've been trying to diversify my portfolio recently and bought (at previously set prices and submitted requests) shares today that I thought would help with my mix of holdings. Then the shares tank and I think - 'if only I had waited'. If I had though I wouldn't have sold my other holdings and had the funds to buy other shares, so it's swings and roundabouts. Then you got exceptions like FBD. I think I examine things too often - I have a portfolio page on Yahoo Finance that gives me live valuations and prices, but it's not great on days like this and it's one of my homepages, so I see it every day.

What has happened in the last fortnight will probably put people on edge for a while though, even if things recover quickly.
 
Is it a temporary panic which will correct itself in the near future ? Is it the start of a long-term reduction in the value of shares? I have really no idea. I do need to sell some shares over the next few months. I don't know whether to sell now or wait until the last minute?

Hi Brendan,

some of your questions require a crystal ball to answer which unfortunately I don't have! However while simplistic, the p/e or earnings yield can give an initial idea of what kind of return you can expect from a market, which is I think a more useful way to look at it than guessing about "overvaluation".

Also needing to sell some shares in a few months seems like not such a good idea, isn't it advisable to keep funds you need in the short term out of risky assets?

Finally my impression from previous posts is that most/all of your shares are Irish. Just in terms of risk reduction, have you looked at diversifying into EU/US/etc.?
 
Also needing to sell some shares in a few months seems like not such a good idea, isn't it advisable to keep funds you need in the short term out of risky assets?

Not really. I have shares so they are very liquid. If I sell them in September when I need the money, they may go down further and I will be happy. It's probably a good idea to have a rainyday fund, rather than to pay off a mortgage or to invest in property, but when you have liquid shares, you don't need a rainyday fund.



Finally my impression from previous posts is that most/all of your shares are Irish. Just in terms of risk reduction, have you looked at diversifying into EU/US/etc.?

I diversified some years ago, mainly to German shares when there was a danger of a euro crash. Two of my shares diversified for me by moving their quote abroad - DCC and Arztya.

But as it happens, diversification outside Ireland would not have helped in the current crash. Most markets tend to rise and fall together as most big companies have diversified their earnings. "Irish" shares such as Ryanair and CRH earn only a very small part of their profits in Ireland.
 
Most of my shares are tied up in UK stockmarket. I had thought about selling some of them back in May. The prices had increased and I would be getting paid in Sterling. I decided not to sell because my dividend yield was far greater than the interest rate I would be getting in Ireland on the proceeds, the dividend is also paid in Sterling. I also didn't need the money.
One of my shares was a UK housebuilder and the outlook for them was/is very good. I have owned most of my shares since 1998. I could have sold these and bought them back again at lower prices on numerous times but didn't. I often wonder why I don't do this. Take my profits and then wait for the share price to drop back again and purchase again. Assuming that the fundamentals are still looking good that is.
I have a few dogs in my portfolio. I will never get my money back on these. At times I think I am expecting my good shares to make up for my bad shares which when you think about it, is a stupid kind of thinking. O.K. next time I am selling when I am happy with my profit, then I am going to buy them back again when they drop. That's a promise. :)
 
Many people have been talking about the uninterrupted bull market in stock markets since 2009, and they were due a big correction. However stock markets have only been recovering from the financial crisis of 2008. If you look at the performance since 2007 they are less than stellar, only the US stock market has improved on 2007, the UK is about even and the european indexes have not recovered to 2007 levels. Also 2007 was a recovery only from the 2001 dot com, 9/11 crisis. We have not had a 1980s or 90s stock market boom. Many people are not invested in the stock market now especially after 2008. Even in the US the value of the DOW is comprised of the mega cap techs like Apple and Google and that has caused the outperformance in the US, the rest of the US market is not so stellar.
The last year has not been good for me due to ill timed investments in oil and mining companies which have been in the eye of the storm recently. Even though mining stocks had already fallen alot when I bought they again fell heavily in the last 6 months.
 
Just a thought but wouldn't it be a great idea if Brendan or a few financial people on this forum invest an imaginary €100k every now and again so we ordinary folk can get ideas and a grasp of what's involved in money investment and gains/losses. Next Tueday is the 1st Sept, might be as good a time as any? A lot of people would appreciate it and we could pick one another's brains and tut tut about people's performances. Might help to keep some lads and girls on their toes.
 
Hi,

I really like this idea but I struggle to define exactly what one would use as an "ideal" reference portfolio. In theory an "imaginary" portfolio is a really good idea because it provides a reference point for investors to compare themselves to. We use a risk appropriate benchmark as a reference for all of our clients so that they can see how they should have done for the risk they took. The benchmark we use is a bespoke blend of index data and therefore excludes all costs and taxes. That's a challenge to compare yourself to let me tell you..... Imagine you are playing tennis and your opponent is Novak Djokovic and you get the idea. So, we also use the client's required return which is the rate they need to achieve and have the best chance of never running out of money. Which again, is fine and a really good idea, the problem is that it is also a straight line - and investments don't move in a nice straight line!!

So my question is this; which portfolio should we use for reference? We could use a portfolio of a typical Irish investor but we know that a typical investor in Ireland has an unhealthy exposure to property, too much cash and inadequately diversified equity investments with a home bias to Irish stocks.

The answer is really that, actually, everyone needs a unique portfolio that is appropriate for their need, willingness and capacity for investment risk and which is consistent with their personal objectives and values about money and investment horizon. Each investor will have different answers to each of these substantive issues, and therefore each should have a unique portfolio.

If we look at the way that many products are sold in Ireland the reference point is "ESMA ratings". That is the European Securities Market Authority which measures portfolios on a scale of 1 to 7 based on their volatility over the last 5 years. Some commentators have argued that the ESMA ratings are meaningless or worse, that they mislead investors. We analysed the volatility of portfolios over a 45 year period and found that in practice over discrete 5 year periods the ESMA ratings of portfolios are fairly stable (with the exception of equities, which up until about 2 weeks ago had been less risky than history would predict)

Let's say for the sake of argument that I could provide 7 model portfolios covering the risk spectrum from conservative to higher risk. That would mean that in order to provide a reference point for most investors I would need to illustrate at least 7 different investment portfolios. So, do we just arbitrarily pick one as our reference?

However, we also need to consider different possible implementations so for example in a tax efficient solution I would use a different set of investments entirely to a pension portfolio in Ireland. This is because some funds are subject to income tax and capital gains tax and some funds are subject to exit tax. So let's say that's another 7 portfolios. However, I actually have two different tax efficient implementations so really another 14 portfolios.

Now, I can also apply a different investment approach to each portfolio range so I could have an active management solution, a passive management solution and a smart beta or what we call Strategic Indexing solution. We have 4 implementations for each option times the number of tax efficient strategies and pension implementations. 7x2x4x3 = 168 portfolios to choose from.

We also have an implementation for Ethical and Sustainable Investing with each 7 portfolios having another 4 implementations depending on the degree of exclusion that the client wishes to apply to their portfolio. We also have implementations for all of the above including and excluding Real Estate and including and excluding Emerging Markets.

Using this simplified methodology we get to something like 5,040 different reference portfolios that I could use to illustrate a single investment of €100,000.

Now, the problem is complicated further by the fact that I don't actually use 7 models for each implementation but actually 100.

So in my universe of possible investment portfolios I actually have a choice of 504,000 different combinations of investments to choose from.

Now here is an interesting observation; many investors are offered just 3 or 5 models.

Google the Financial Conduct Authority and "shoehorning" for the UK regulator's views on investors being squeezed into a narrow range of reference portfolios.
 
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No disrespect to Marc but he's a financial advisor it's in their interest to make investing seem as complex as possible when it's rather simple.

500k different portfolios is just silly just buy a an ETF that tracks the total stock market if you want more risk pick your own stocks.
 
Fella

I have a client who's father died from lung cancer as a result of smoking.

An ETF that tracks the total stock market would include companies such as Philip Morris and BAT

This is just one example of tens of thousands of reasons why a one size fits all solution is never the right answer.
 
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Fella

I have a client who's father died from lung cancer as a result of smoking.

An ETF that tracks the total stock market would include companies such as Philip Morris and BAT

This is just one example of tens of thousands of reasons why a one size fits all solution is never the right answer.

I know Marc I appreciate what your saying but just google ethical ETF's and buy one that excludes tobacco companies .
I think the majority of financial advisors make things extremely complicated deliberately your saying 500k portfolios I could make a million portfolios myself combining different companies , it's a zero sum game you can't make a bad purchase of any stocks in an efficient market once the spread is low you are buying at par value , the more you buy in different sectors the less variance you should feel , I think financial advisors won't make much money just telling everyone to stick their money in a low cost index tracker and forget about it. So they make it more complex than it has to be.
 
I accept some of your argument given that it is the basis of a 12 week course I teach at Dublin business school,but you assume that the role of a competent financial adviser is to pick winning funds.

This is an increasingly outdated view of the world.

I don't manage investments so much as I manage investors.

Ben Graham who is Warren Buffett's mentor said that "the investors chief problem, and even their worst enemy, is likely to be themselves"

On average the damage that an investor does to their returns simply due to emotions is around 3%pa. see Dalbar studies.

You can't be objective about your own money. That's why I have an adviser to keep between me and stupidity.

Secondly in Ireland the biggest single value add I bring is managing taxation.

The taxation of ETFs is horrible for an Irish resident investor.

For example if you buy a Ucits you are subject to exit tax at 41% on both income and gains and each ETF is treated as a separate investment with its own tax reporting obligations and no loss relief between investments

If you buy a Luxembourg domiciled fund that invests in U.S. Equities you pay dividend withholding tax at 30% with no credit against your exit tax liability.

If you buy a U.S. ETF you are subject to federal estate tax at a rate of up to 40% on investments over $60,000 with no credit against Irish CAT so a theoretical estate tax liability of 73%!

You also seem to imply that the only portfolio that is relevant is one that is 100% stocks.

You don't mention how asset allocation between stocks, bonds. Cash and other assets such as real estate has been shown to explain around 90% of the variation of portfolio returns. Brimson Hood et al.

You also don't discuss the optimum allocation between developed and emerging market equities. Do you go with the market cap weight and if so which index provider are you using FTSe msci or other. Have you considered GDP weighting for emerging markets? Also do you equally weight of market cap weight.

What is your view on fundamental indexing. Do you overweight small and value stocks based on the Fama French three factor model.

What about other factors such as momentum and quality. How do you assign portfolio weights to these factors?

I do all these things and more for my clients all within the context of indexing
 
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Marc I just had a look at one of your studies I know you like to quote a lot , the Fama three factor model , it's a seriously complicated way of explaining the obvious it's basically increased risk = increased expected returns , decrease risk = decrease expected returns and basing this on small cap or large cap , I don't value any stocks I believe in an efficient market let the weight of money sort it out , if it's overvalued it will be shorted and undervalued it will be bought until we get a par value .

I didn't get into mention cash or bonds there are a few simple suggestions like keeping your bond allocation in line with your age as you get older you have less time for your shares to recover from a crash etc.

But I mean there is know perfect allocation in my mind , it's fairly obvious that emerging markets will be higher variance than an msci world index so buy less of one than the other depending on your risk profile.

I agree with you the tax is a nightmare but we got to the bottom of that thanks to revenue finally clarifying some things on ETF's .

You know your stuff but past studies are useless in my opinion , nobody can beat the market as it's a zero sum game so let's say that the only thing that can be changed is risk / return , then it's common sense from there putting all your money into a handful of stocks is a lot riskier than all your money into total stock market .
 
From just watching.

In 1970,s it was fashionable to buy into Irish Oil shares .( yes well!)
Mid 70,s a lot of (educated) people planted potatoes as a sure bet. (they weren,t)
In 2000,s people (invested) in property as a sure fire bet ( they got burned)
Chinese shares seem to have finally had their bubble pricked.

It appears even the (experts) don,t beat msci over the longer term.

Common threads seems to be short -term thinking and the lure of a quick buck, plus a herd mentality, with minimal examination of what is happening at a fixed point in time ,ie not future thinking.

Am inclined to takes Fellas comment{common sense to have your money in total stock market}.
Am inclined to take Fellas advice on linking risk with age.
 
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