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How to position your portfolio for a mermaid invasion

There may be a lot of uncertainty in the near future.
Image: Shutterstock

I am sure you have all seen headlines of the type “Position your portfolio for [x]”. And x could be anything really – from the coronavirus, to junk status, to the 4th industrial revolution.

I used to devour these types of articles. And why not? The experts and market commentators quoted always had solid reasons about why it was a good idea to move some of your portfolio out of this and into that. It always made perfect sense.

And then, after reading the article, my mind would start ticking over. I would start to develop an itch to listen to advice and do something. These types of articles really leave an impression and make you question aspects of your current investments.

But a few years back, something happened which totally changed my perception around these types of articles, as well as the experts and market commentators which contribute to them.

My interest in finance and investing has resulted in me being on a few investing-related email lists. And so one day I received a pretty interesting email from a respected fund manager. It was right before the US election in 2017, and the latest opinion polls were in – Hillary Clinton was going to pip Donald Trump and become the next US president.

The email went on to say that the fund manager was “positioning their portfolio” for a Hillary Clinton victory. It went on to use some of the usual big and impressive sounding words the investment industry likes to throw around. I mean this is an expert after all and they must know what they are doing. Everything must be under control.

But then, shock and horror, we all know how the elections actually went – Trump won!

The same fund manager then sent another communication about how they had now gone and “positioned” their portfolio for Trumps presidency. It would now be significantly more defensive, because Trump as president was expected to be bad for the US markets. So they decided on less investing into the US markets and more money into safe stuff like cash and bonds. More big words, and more solid reasoning – thank goodness this highly-qualified, highly-experienced fund manager is on top of things and knows how to “position” their portfolio.

Except, within a week, the US market was up. The next month it was up too. The next year it was up, and in fact it hasn’t stopped going up since then. But thanks to all this “positioning” the investment manager lost out on a lot of this growth.

I quickly realised that not even the experts really know how to “position” a portfolio.

And there’s another problem with “positioning” your portfolio – not only was the investment manager wrong about their first position, but when the position changed, the positioning they took to fix their previous position left them in a bit of an awkward position!

And this leaves the investor in a difficult position.

If they had just followed one of the basic principles of investing – invest for the long term, ignore short-term noise, and it’s the time in the market and not the timing of the market – they would have achieved a significantly better outcome.

Now I am not saying that investment managers and financial experts are stupid – quite the contrary actually; these people are highly qualified, vastly experienced, and super smart. And maybe next time they will get it right. It just seems like this whole “positioning” your portfolio business is more about luck and less about skill or knowledge?

And something else I have learnt (often the hard way) over the years, is that doing nothing is almost always the best action to take. Once you have settled on an investment strategy, it is important that you stick to it.

Remember you have chosen your investments for a reason, and if your time-frame is long, and your portfolio is well diversified across geographies, sectors, asset classes and currencies, then your portfolio will never ever (ever ever) need to be “positioned” for anything, and that includes the latest media-fuelled end-of-the-world crisis.

A well-diversified portfolio will be able to ride out political shenanigans, hiring and firing of finance ministers, economic turmoil and any other uncertainty the world can throw at you – that is the whole point of being well-diversified!

History has shown that if you stay the course, keep investing, and avoid “positioning“ your portfolio every time you read a headline about the next crisis (there’s always one isn’t there?) then your portfolio can survive just about anything – including 2 world wars, great depressions, oil crises, dot-com busts and global financial crises.

So, how do you position your portfolio for junk status? The same way you position your portfolio for investment-grade status – diversify across geographies, sectors, asset classes and currencies, and then just have patience.

And how do you position your portfolio for a low-growth environment? The same way you position your portfolio for a high-growth environment – diversify across geographies, sectors, asset classes and currencies, and then just have patience.

And finally, to address the headline of this article, how do you position your portfolio for a mermaid invasion?

Move everything into bitcoin (obviously!)

This story was originally published on the Stealthy Wealth blog here


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Love this article – So true !!!

It is unadulterated drivel! The ‘market’ is where it is due to share buy backs and low interest rates, i.e. financial engineering and not actual engineering. I am reposting some info from August last year to give an indication of the time your portfolio may need to recover from the coming plunge.
In China, the Shanghai composite is now back where it had first been over 12 years ago, and it’s down 53% from its peak in Oct 2007.

Japan’s Nikkei index is back where it had first been in 1986, and is down nearly 50% from the peak in 1989. That was 30 years ago. And the index is also down from two years ago.

In Germany, the DAXK which is comparable in its structure to the S&P 500, is back where it had first been in 1999.

In the UK, stocks reached a new high in May 2018 but have since fallen off. Currently, the index is just 7% above where it had first been in December 1999. So it made 7%, not per year, but over the course of two decades.

The French stock index is back where it had first been in 1999 and is down 24% from its peak in 2000.

Italian stocks are still down 60% from their peak in 2000.

Spanish stocks are down 45% from their peak in 2008 and are below where they’d first been in 1999.

The Canadian stock index, the TSX, is up about 10% from its prior peak in 2008, with a huge plunge in between. So that’s a gain of less than 1% a year. Not even keeping up with inflation.

The entire world as come to invest in the S&P 500 because it was the only big index that was thought to be going anywhere, and this money-flow from around the world has helped inflate it.

But American companies are no better than German or Japanese companies. Far from it. They are, however, very good at financial engineering – which is not a beneficial long-term strategy.

And the fact that the S&P 500 has continued to surge, while nearly all other markets with stable currencies have been poor, is not proof that this outperformance will just continue in the same manner.

The blind exuberance about stocks and just about all other asset classes in the US tells me that there may not be a lot of eager buyers left to keep inflating every corner of the vast Everything Bubble. Signs of that are already everywhere.

Central banks have not been able to levitate those other stock markets, despite all their efforts. This includes the efforts by the Bank of Japan, whose huge QE program includes buying equities. In the end, there is no cure for a bubble other than unwinding the bubble. And this – as those other stock markets have shown – can take decades of down-trends, where buy-and-hold is a losing strategy, and where lucky market timing is the only thing that works, but where unlucky market timing is profoundly destructive.

Oubok has hit the nail on the head. Great reply. Clive Roffey has been calling a market top for months and if you’d taken his advice you would be doing way better than being in the market.

And there’s going to be a time, if we can beat this virus, that markets will roar back. But it is almost certainly too soon to go back in now

Trump and central banks may stimulate ( money print and more unrepayable debt) but no amount of stimulation is going to get you on that cruise ship. And that’s why is probably won’t work this time

The only positioning that has ever worked for me is to go into a bombed out sector and then with a 5-10 year view such as having gone into mining in 2015. Right now I would suggest positioning for a recovery in REITS but would still steer clear of construction, for example.

The investment horizon and the event horizon are not often in the same dimension.

This can lead to a paradox of action and inaction, doing or distraction, creating and destroying.

A paradox of life!

The event horizon does over time formulate our perceptions, which will lead us to follow one particular strategy over another in the longer term.

The less I waiver from that evolving long-term vision, the better I can perform. Until death that is!

Damn, I thought this would be an article on what to do when your whole portfolio is underwater ….

This article has made such noteable sense that few people have commented. I was hoping for more on the mermaids. Is it not time Moneyweb offered a travel and leisure section?

Nice one.

Agreed. Best to just rebalance as the equity portion in a balanced portfolio might be getting a bit light now.

When you are young you have an opportunity to invest this means you are net buyer of assets.

In retirement you are a net seller of assets.

In the latter category my approach would be the following:

– set aside 2 years of pension into an SA income fund this will guarantee you growth of 9% while you draw this down.
– the balance should be 100% in equities. The history of the S&P shows that a market correction will not last longer than 2 years. There will be an opportunity to sell equity assets in the two year window to replenish the income funds.

I would be very happy if people would comment on this approach?

This is more or less what I am doing at the moment except that I have in addition kept a big stash of cash aside (big by my paltry standards, that is :-)) to invest when the S&P inevitably collapses by 40%+.

Very interesting strategy “TTR”. It can work (assuming you have most of your ret monies in discretionary funds in order to do this. But even with some portion of discretionary funds on the side, it appears like a sound strategy). Never though of that! Everyone start out with a mix of funds & draw pro-rata from everything as they need ret income.

However, I’d stretch the 2yr horison (i.e. the part to live off Income Funds) to at least 5 years (or better still, 10yrs). This gives the volatile nature of equities a longer breather over time to grow, before drawing on them.

(Even when all Income Funds are lived off/depleted after say 5-10 yrs, nothing stops you to take profit from some equity gains in the final years & switch some to Income Funds to derive income from in later years…while still having mostly equity left over in final years). Your risk profile would go up towards the end (but assuming that it will do so well, that you’ll be able draw a lower % of capital to live off, than otherwise)

Just be mindful of CGT when you keep equity funds accumulating growth over a lengthy period. Rather mitigate CGT to use some of your R40K annual CGT tax exemption, when you re-shuffle equity portfolios during their build-up phase)

Excellent article! Well done. I think we need to talk to the role of Emergency Buffer (EB) in times like these, where expert talk doom and boom and gloom all together. I consider “sufficient” EB as the 9th wonder of the world, after Compiund Interest. Anyone with this is not gonna be panic stricken…in fact will laugh through turbulances. Once article again.

End of comments.





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