Copy of "My shares have fallen 30%, what should I do?"

[Brendan Burgess]

To save people reading through lots of posts in different threads, I am going to summarise my views and the contrary view in this thread.

There are two camps

Camp 1 believes that you cannot time the market. In other words, it's not possible to identify whether the market is overvalued or undervalued.

However, history has shown that the stock market has outperformed other markets including bonds and cash and there is no reason to believe that this will change.

If you cash out now, there is a real risk that you will miss out on the market recovery when it does happen.

I belong firmly to Camp 1 as do most professional investment managers and investment advisors.

So you should not sell out now. If you have cash and you can handle stock market volatility, you should buy a diversified portfolio of shares either directly or through a fund.

Camp 2 is comprised of individuals who believe that they can predict the future and that the market will drop further and the recent falls are only the start of the problem. They also believe that they will be able to identify when it's right to buy back in to the stock market.

The problem with this is that study after study shows that there is no evidence that anyone can do this consistently. Individual posters will tell you that they saw this coming and sold all their shares 6 months ago and they will buy in again "when the time is right". Personally, I would put no weight on those claims.

Camp 3 - The Duke's Camp

Camp 3 is similar to Camp 1 in that it does not claim to know what will happen in the future. However, the past is no longer a useful guide as we are in uncharted territory. The Coronavirus is a new phenomenon as is the extent of Quantitative Easing.

History might not repeat itself under these circumstances.

So while Camp 3 does not attempt to forecast the market, the level of risk outweighs the potential gain.

 

[Brendan Burgess]

Applying this to your personal financial situation.

If you have a pension fund, your investment horizon is long-term and you should not switch it to cash or bonds.

If you have cash, but you also have a mortgage or other borrowing, you should pay off these borrowings before investing in the stock market.

If you are invested in the stock market and you will need the money in the near future, then it's a very difficult question.

For example, if you are in the market to buy a property and the deposit is invested in the stock market, then you will probably need to sell enough shares to make sure that you can go ahead. Of course, if you are about to buy a house, you should not be invested in the stock market in the first place.

If you are saving up to buy a house in 5 years, then that should be a long enough time frame to remain invested in the stock market.

 

[jim]

Brendan,

In relation to Camp 2, i think those individuals do not claim to predict the future as you say. What they are doing is applying probability. So if they anticipare the market will fall further based on real world events this isnt predicting the future. This is applying logic based on current events that are unfolding.

Genuinely curious in posing the question - is it not possible to take action to protect ones fund ie move to cash if mkt has fallen and you belive it was fall further.

Then buy bk in when you believe it will rise.

Obviously this is timing but why is this strategy so derided if the investor themselves is confident, in as far as one can, be that the mkt is either rising or falling at a given point in time? Of course they may get timing wrong and loose out but they may also protect their fund

 

[JSnowWinterfell]

Brendan,

Thanks for putting this down, your logic holds true if investing in a broad market index, but you should clarify that rather than use the term "buy shares". Whilst the recent depreciation is across the market, investors still need to do their due diligence on individual companies.

I less agree with your definition of Camp 1 / Camp 2, that is not true, and it shouldn't be said with such matter of fact.

 

[Brendan Burgess]

your logic holds true if investing in a broad market index, but you should clarify that rather than use the term "buy shares".

Thanks J. Good point. I have amended my post.

Brendan

 

[Investadvice]

Decisions will defer depending on life stage and just how much one follows current affairs and financial markets.

If you are 55+ or/and have a a good deal of liquid assets to hand then maybe you should be looking at world events and judging on investment scenarios wisely, i.e not just following the market blindly.

It's been obvous the stock market had been in a bubble and since Feb one could tell covid-19 was a serious risk. Based in a balanced assessment of risk cashing out of gains up to 12 months ago would have been prudent.

if you have no interest in politics, don't follow financial markets and are generally apathetic to how world events may change your circumstances then just leave things invested and ignore.

I can see why a financial planner would suggest to not do anything To persist with the notion of invest and forget is s great way to ensure you continue to make your % cut on your clients investments while doing the minimal degree of advising that could be proven incorrect.

 

[Duke of Marmalade]

Can I suggest a Camp 3. Clearly the market sentiment is currently almost entirely driven by the Corona Virus thing. So nearly all conventional evaluation processes are out the window. The only question that matters is how will CV play out both in medical terms but also in terms of how governments and the populace behave in the face of the threat. The signs are that globally we will try to err on the safe side and the economic implications seem to be taking a back seat.

Even the medics cannot predict this. So everyone is almost equally well (or badly) placed to get a sense of the possibilities. From what I read the range of possible outcomes is very wide indeed. It is not off the radar that we will see a complete meltdown in stockmarkets. After all, if global economic activity is set back 50 years won't the markets follow?

The most one can say on the plus side is that it would seem that it will be some time yet before we can say we have got over this thing and it is hard to see the stockmarket upside to be any more than clawing back recent losses.

So in my Camp 3 I see staying with or entering the current market as a hugely risky prospect in "utility" terms.

 

[Brendan Burgess]

Hi Duke

I don't see how Camp 3 differs from Camp 2.

Is it "We can't predict the market , but it could be very bad indeed but might not be?"

Brendan

 

[Metatron]

Hi Duke

I don't see how Camp 3 differs from Camp 2.

Is it "We can't predict the market , but it could be very bad indeed but might not be?"

Brendan

At the risk of offending certain snowflakes on this site, I will add my two pence and stick my head above the parapet.

S&P went into a bear market last week in truly dramatic style. The corona virus is know a pandemic. There is no stopping it until a vaccine is found, we can only reduce the volume of people who present at hospitals at any given time by self isolation, social distancing etc to help reduce potential fatalities that could be otherwise avoided. Everyone with me thus far.

Now, would one currently invest in BA, Hertz, or companies that are tourist dependent. Simple answer is no, unless of course you believe the particular company share price cannot fall further, or its real worth (assets) far exceed its liabilities or potential liabilities. Warren Buffet has made billions by investing in global equities. He states “buy when there’s blood in the streets.” He studies companies and invests when he believes the time is right, he cashes out when he feels companies are overvalued. He has made some mistakes,like everyone he is human, but overall his successes far outweigh his failures. His overall decisions have been very profitable and are based on sound economic data, geo political situations, market volatility etc.

No one, but no one can predict the future or indeed how the stock market will react in the future, but you can make informed decisions and dip in and out of the market, This is something I do quite well and have made a good living out of same, as oppose to some of my property decisions in this Country. So Brendan, please don’t rubbish camp 2, because these are the people camp 1 rely upon.

 

[Metatron]

Most professional investment managers follow a computer programme, yes a computer programme that notifies them of share movements. For example if Mr Soros invests 20 billion in Oracle, this is alerted to the market and the herd follows. When I say herd I mean institutional investors. If for example I managed a fund that wants a steady return on its investment over a prolonged period, I will avoid risk and stick with stock that delivers a relatively low but consistent return. If I managed a more aggressive fund that seeks larger returns on its investment then I will invest in more risky stock that can potentially deliver higher returns. However my trusty computer algorithm is constantly telling me the overall position of my fund, whether that be safe or more risk adverse. I am not a leader but a follower. Timing the market is EVERYTHING if, like Buffet, you wish to make vast wealth. This the the difference between the leader and the herd. Having knowledge milliseconds before anyone else and hitting that buy and sell button, can make the difference on whether you win or lose on your investments.

 

[Gordon Gekko]

Recent events simply illustrate the importance of having a well thought out investment plan and sticking to it.

If I have a decent time horizon, then I should take that money and invest it in a diversified portfolio of shares.

Yes, Covid 19 might appear or the US might attack North Korea, but my crutch is my time horizon.

Stock markets do very well over time but they are volatile; I fully expect my investments to do well over time, and by well I mean 6-8% on average over the next 50 years. But what I can guarantee is that the ride won’t be linear; it’ll be +30%, +6%, -25%, +4% and so on and so forth. If it was easy, everyone would do it and those good returns just wouldn’t be there.

But the salient point is that in times like this you do not sell and turn a temporary loss into a permanent one; if your time-horizon is still decent (i.e. 5+ years) and you’re diversified, stay the course. Wealth is created and preserved by time in the market, not timing the market.

 

[Brendan Burgess]

in times like this you do not sell and turn a temporary loss into a permanent one; if your time-horizon is still decent (i.e. 5+ years) and you’re diversified, stay the course. Wealth is created and preserved by time in the market, not timing the market.

Excellent summary

 

[Duke of Marmalade]

Hi Duke

I don't see how Camp 3 differs from Camp 2.

Is it "We can't predict the market , but it could be very bad indeed but might not be?"

Brendan

It is more like Camp 1 than Camp 2.

Camp 2 is comprised of individuals who believe that they can predict the future and that the market will drop further and the recent falls are only the start of the problem.

Camp 3 folk say they haven't a clue.
I think every one now perceives the stockmarket to be extremely volatile (risky) in the immediate term at least.
Now conventional theory is that the pricing mechanism acts to reward this short term volatility. On the other hand the market hasn't been allowed to find its natural level - it is being hugely supported by central government. That works fine if either the sell off is irrational or it is due to technical liquidity problems.
The latter is not really an issue this time and who knows if the reaction to CV is irrational. It could turn out that the official support is only inducing punters in on a false premise.

 

[cremeegg]

Brendan, the above post 1 is a very biased summary of those who dont agree with you.

Camp 2 is comprised of individuals who believe that they can predict the future

So basically anyone who disagrees with you is claiming supernatural powers. That's not discussion Brendan thats just slagging people off.

Clearly the market sentiment is currently almost entirely driven by the Corona Virus thing. So nearly all conventional evaluation processes are out the window.

Exactly, so the usual pricing mechanism is not working as well as usual.

Markets price shares efficiently when lots of informed, willing buyers and sellers are present.

Right now no one is an informed buyer or seller.

The S&P 500 turned on 15th February exactly one month ago. The corona virus has a long time to run.

 

[elacsaplau]

Recent events simply illustrate the importance of having a well thought out investment plan and sticking to it.

Hi Gordon,

Well articulated and I see the logic of your position from your perspective. The rationale of your personal approach is solid because of your investment time horizon and your human capital (specifically your expectation of earning a crust until your investments are needed).

The message to retirees is similar and different. Similar in that they need to have a well thought out investment plan but different (if their only or dominant source of income is in an ARF) in that all-in equities is very risky because their time horizon is greatly reduced, as is their human capital.

Another poster talked about the possibility of the markets going into complete meltdown - folk in their golden years should not be exposing themselves to the risk or anxiety that all-in equities must, in all probability, engender. [I have consistently warned about this risk - often to very deaf ears! It's only when the tide goes out and all that....]

 

[Brendan Burgess]

Brendan, the above post 1 is a very biased summary of those who dont agree with you.

What?

I introduce the thread as a summary of my views and the alternative views.

There are plenty of people here who believe that they can predict the future.

Duke has suggested a 3rd Camp. When I get my head around it I will include that in the summary.

Brendan

 

[Investadvice]

What?

I introduce the thread as a summary of my views and the alternative views.

There are plenty of people here who believe that they can predict the future.

Duke has suggested a 3rd Camp. When I get my head around it I will include that in the summary.

Brendan

People can't predict the future but they can read current affairs and news and then make rational decisions.

2005 - 2008 massive consumer leverage across the western world

2018 - 2020 crazy share buy backs fuelled by debt, zombie companies, QE, asset inflation.

Signs are there the key is if you act once the trigger point starts the dominos falling.

You may not get the exact timing right to the day but I'd rather be a few months out than looking at 30% loss of wealth. Especially if said wealth is to get you through retirement.

 

[jim]

@Investadvice i think you have hit nail on head esp in your 2nd last paragraph.

This is my point also. Why do nothing and watch the market fall further when you can act now and mininise the impact on your fund, regardless of time horizon?

You can always buy back in when you feel the time is right ie mkts start to recover.

Why would you passivly do nothing if you have coviction and are willing and able to act on it? Why??

 

[Gordon Gekko]

Hi Gordon,

Well articulated and I see the logic of your position from your perspective. The rationale of your personal approach is solid because of your investment time horizon and your human capital (specifically your expectation of earning a crust until your investments are needed).

The message to retirees is similar and different. Similar in that they need to have a well thought out investment plan but different (if their only or dominant source of income is in an ARF) in that all-in equities is very risky because their time horizon is greatly reduced, as is their human capital.

Another poster talked about the possibility of the markets going into complete meltdown - folk in their golden years should not be exposing themselves to the risk or anxiety that all-in equities must, in all probability, engender. [I have consistently warned about this risk - often to very deaf ears! It's only when the tide goes out and all that....]

Yes, but that’s why most retirees wouldn’t be 100% invested in equities. And we should be wary of phrases like “complete meltdown”; what does that even mean? Was the Global Financial Crisis “a complete meltdown”? Because, give or take, markets have almost doubled since they reached the top in 2008. That’s right; the unluckiest punter in the world who invested in a diversified equity portfolio at the height of the 06/07/08 mania has virtually doubled his or her money since then. Provided they ignored the noise (Exhibit A, these threads) and simply hung tough with their time horizon as their friend.

 

[adox]

I’m 53 and 100% in equities and maximise my pension contributions.
As tough as it is I’m staying put and gonna ride this out. I’m still 12-15 year away from drawing down. enough of a timeline I hope to recover and gain again.