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Bond/fixe interest etc part of Balanced Portfolio
King Lodos
Posted: 14 May 2018 05:55:35(UTC)
#20

Joined: 05/01/2016(UTC)
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Joe 90;62262 wrote:
Rather than looking at percentages I’m asking how long would it take for a significant stock market correction to recover. I’ve read that since 1900, when taking account of dividend reinvestment and inflation, the average recovery time after a crash has been around 2 years. Apparently even the 29 year Great Depression actually took more like 5 years for the market to recover. The longest was 8 years in the 1970s.

Of course I can’t verify these claims without further research but assuming they’re correct, I figure if I can hold cash (or cash equivalents) worth (say) 5 years of living expenses then I ought to be ok regardless of what percentage of my portfolio this constitutes.


It can be longer .. From 1905 to 1925, 1930 to 1950, and 1965 to nearly 1985, US stocks made negative real returns ... So 20 year downturns are relatively common.

Outside the US, they can be much longer .. France and Germany have suffered very long downturns .. And some traders keep a copy of this chart above their desk: Japanese stock market (at the time the 2nd largest economy in the world) falling over 80% from 1990 to nearly 2010

http://www.onemint.com/wp-content/uploads/2011/02/nikkei-225.jpg

Japan's still in that drawdown, and you wouldn't know it looking at the country .. Some people think that kind of drawdown would be a shotguns and tinned food scenario – not necessarily .. The real risk of stocks (and the only reason they provide above-inflation returns) is an irrecoverable loss of capital (within an investor's timeframe) .. Cash gives you a way to get yourself out of those holes sooner .. But then you can see how difficult it would've been to know when to buy back into Japan .. Valuations could've helped you out in Japan


2 users thanked King Lodos for this post.
Tim D on 18/05/2018(UTC), 7upfree on 18/05/2018(UTC)
7upfree
Posted: 18 May 2018 12:47:01(UTC)
#21

Joined: 15/03/2018(UTC)
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King Lodos;62264 wrote:
Joe 90;62262 wrote:
Rather than looking at percentages I’m asking how long would it take for a significant stock market correction to recover. I’ve read that since 1900, when taking account of dividend reinvestment and inflation, the average recovery time after a crash has been around 2 years. Apparently even the 29 year Great Depression actually took more like 5 years for the market to recover. The longest was 8 years in the 1970s.

Of course I can’t verify these claims without further research but assuming they’re correct, I figure if I can hold cash (or cash equivalents) worth (say) 5 years of living expenses then I ought to be ok regardless of what percentage of my portfolio this constitutes.


It can be longer .. From 1905 to 1925, 1930 to 1950, and 1965 to nearly 1985, US stocks made negative real returns ... So 20 year downturns are relatively common.

Outside the US, they can be much longer .. France and Germany have suffered very long downturns .. And some traders keep a copy of this chart above their desk: Japanese stock market (at the time the 2nd largest economy in the world) falling over 80% from 1990 to nearly 2010

http://www.onemint.com/wp-content/uploads/2011/02/nikkei-225.jpg

Japan's still in that drawdown, and you wouldn't know it looking at the country .. Some people think that kind of drawdown would be a shotguns and tinned food scenario – not necessarily .. The real risk of stocks (and the only reason they provide above-inflation returns) is an irrecoverable loss of capital (within an investor's timeframe) .. Cash gives you a way to get yourself out of those holes sooner .. But then you can see how difficult it would've been to know when to buy back into Japan .. Valuations could've helped you out in Japan




Japan is the one which keeps me awake at night. It is the main reason that I largely invest globally. It's possible in the future that 50% of the world will be down and 50% up and the portfolio will trend sideways - who knows. A repetition of Japan 1989 and the decades that followed for the world would leave us all in a position where equity markets would be the least of our concern!

It is worthwhile keeping in mind a few points, however. In 1990, the dividend yield of the Nikkei 225 was c.1% and it traded on a PE of over 50. At the same time, you could have had over 6% on the Japanese 10 year. Even with the benefit of hindsight, a long only equity position would have been insane. Also, the run up in equity markets over the preceding 4 years was remarkable; on one view, all that was being given up was the excess gains. The investor who had been pound averaging for 20-30 years had fared pretty well by the end of the lost decade. Two points to take away for me:-

1. At extremes of valuation reduce your stock portfolio - Bogle

2. The optimum period for holding stocks: forever! - Buffett.

Finally, the Nikkei 225 TR index is now just shy of its 1990 "high".

PS and Off Topic - and I keep making this point to the Safe Withdrawal Brigade in the context of Japan. Let's say that I retire and the market PE is 20. Assuming I am fully invested for the preceding 5 years from when the market was on a PE of 10, my portfolio has doubled. I decide that my SWR is 2%. Let's say the scenario above is reversed. I can then decide my SWR rate is 4%. Both investors are in the same position at retirement. If you have had the benefit of the rising market pre-retirement, you need to reflect that in your SWR. So the man in Japan who had seen his investments treble in three years or so needed to face up to his SWR of 0.8% in 1990. He would have been no worse off than if the market had been static in the previous 3 years in which case he would have been safe with his 4%. SWR needs to look forward and back and focus on the cash value of the distribution.
3 users thanked 7upfree for this post.
Julianw on 18/05/2018(UTC), Tim D on 18/05/2018(UTC), Mr Helpful on 18/05/2018(UTC)
King Lodos
Posted: 18 May 2018 15:14:37(UTC)
#23

Joined: 05/01/2016(UTC)
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Valuations were a tricky one with Japan ..

The CAPE ratio makes it look like it would've been easy to see the bubble – but a) we use that with hindsight; and b) it's looking at earnings 10 years ago, so could paint a terrifying picture for many of the stocks people are buying in Baillie Gifford funds today.

Here's Japan's Forward P/E in the 90s:

http://www.etf.com/sites/default/files/images/japan_valuation_mainstay_invest.jpg

It wasn't in obvious bubble territory, at least any more than stocks today are .. The valuations climbed as prices dropped, because fundamentals dropped even faster .. So stocks can get more expensive as they fall – even after they've fallen 50%.

6% bonds vs 3.2% on stocks on the back of strong growth .. I like to think I'd have chosen bonds .. That was with about 3% inflation – so you'd have had to have quite a conservative attitude .. which does tend to work out better over the long-term.

My main source of optimism is that markets are presumably far more efficient today .. With so much more information available, I'd like to think markets would see situations like Japan and the Financial Crisis a lot earlier .. Hedge funds back then could take advantage of a huge information gap between average investors and the elite .. No one's sure that still exists – which would be a great thing for the average investor
1 user thanked King Lodos for this post.
Tim D on 20/05/2018(UTC)
7upfree
Posted: 21 May 2018 19:51:16(UTC)
#24

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Of course, the decision to double interest rates over a period of 18 months certainly did not help in 1990! There's a fair amount of research that suggests the ratio between bond yields and 1/PE can predict market crashes (have a google for BYESD). Doesn't work in circumstances such as 9/11 but it's another useful measure. I am certainly coming round to the view that some form of tactical asset allocation is desirable. Buy and hold feels like a risky strategy - particularly the more you have. It feels like a strategy that was most at home when information was not as freely available as it is today. I think the protection of capital is under-discussed in general and I am looking at Faber's moving average strategy to try and protect on the downside. In absolute terms, the FTSE looks fairly valued; in comparison with the UK 10 year, it looks undervalued. In the US, the converse is true. Globally, bonds and stocks relative to each other do not appear to be overvalued, even if they are expensive in absolute terms. Where else is the money going to go until rates start to rise? Cash, meh. Real estate - maybe but UK property in particular is not cheap. Commodities - looks like money is headed in that direction at present giving the feel that we are late in business cycle.
Mark Coomber
Posted: 22 May 2018 09:54:44(UTC)
#25

Joined: 02/05/2012(UTC)
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DENNIS;382 wrote:
Best to go for a Unit Trust fund to spread your risk. I find Hargreaves Lansdown a very good on line service.
.........but far too expensive.
1 user thanked Mark Coomber for this post.
Aminatidi on 22/05/2018(UTC)
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