Prepare For The Bear – building your contingency plan

Fri 08 Dec 2017

By Brian Dennehy

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Portfolio building


Two weeks ago our blog (Investing in an Age of Radical Uncertainty) read a bit like a death notice. Sorry. Now I want to build a contingency plan taking that into account.

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(Investing in an Age of Radical Uncertainty

Being a little nervous is the way you should be when investing – a little anxiety means you are more likely to pay attention to relevant detail, and less likely to get distracted.  So if the content of that previous piece was both fair and relevant, you must respond with a very clear plan for action.

Clear thinking is key.  For example, there is no point having bits of this and bits of that to give a veneer of diversification.  Too many funds or stocks is a distraction when markets fall hard and fast.

Plus, we don’t believe you should be in a fund just because you think it will not fall as much as others – this is a bit woolly.  In addition, some of the greatest risks are within sectors that we might ordinarily think are lower risk. 

For example, corporate bonds, especially high yield, and be wary of risks hiding within so called strategic bond funds.  As we saw in 2008, some bond funds can fall as much or more than those invested into stock markets.

At this point the only funds you should hold (in addition to cash) will be in one of two categories:

  1. A fund bought based on a process where there is clear evidence that the fund is more likely than not to outperform in the 6 months ahead e.g. using Dynamic Fund Ratings.
  2. A fund invested in an asset class where there are reasonable grounds to expect longer term outperformance against other global asset classes e.g. India.

That’s it. 

The issues to address then become

  1. Which funds fall into category 1?
  2. Which funds fall into category 2?
  3. What % proportion should you have in cash now?
  4. How should this change as markets fall?
  5. How/when should you buy back in?

(As an aside, if considering adjusting/selling funds outside a SIPP or ISA, do make sure you know if that might generate a capital gains tax charge.  We don’t believe the latter should stop you making prudent investment decisions, after all the tax arises because you have invested successfully.  But you should check this in advance.)

This is the start of our approach with advisory clients.  What we would now like to do is build that out in a way which is relevant to you, a self-advised or DIY investor.  We will do that in next week's Wednesday teleconference (email with detail to follow shortly).  There’s some very interesting stuff here, so do feedback with your thoughts and questions ahead of the teleconference. 

We’ve already had a few questions, particularly focussed on the cash angle, and we’ll pick this up on Wednesday.  As before, the teleconference will be recorded, so if you miss it you can always catch up later on.



Thinking of Gold Membership?

Our stop-loss page went live at the end of November for Gold Members and we’re continuing to develop that.  At the beginning of December, we also launched the Dynamic Portfolio Library, which includes info on many of our Dynamic Portfolios as well as ongoing updates to fund choices as we hit review points.  These are both only available to Gold Members but it's only £1 for the first month.


With all the tools and research we're developing it's certainly worth giving Gold Membership a try!


Portfolio building


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