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"The bull market is more than five years old ... How can I protect myself?"
Easiest thing for folks to do is rebalance. Folks should simply sell enough equities and buy enough bonds, cash or whatever, to bring things back into their target allocation. Not doing this can be brutal as witness the dot.com meltdown in 2000. Nas went south, what 70% and the SPX 50% (??), and if you had been riding your gains, your percentage of equities could have risen from 60% to 80-90%. And the gains were that substantial on the runnup. If you had rebalanced you would have saved 20-30%. Rebalancing should be at the minimum, an annual event. Not much different from drawing down your winnings at the casino.
Now's a very good time being the end of the year. Anyone have tax losses? I got beaten like a rented mule on my MI muni bond fund. Alas. Oh well, at least grab the tax benefit whilst I still can.
I agree with rono on the rebalance theme. I think this is most important and this should be done at least once a year. Since some of our strongest equity returns seem to come in the 4th and 1st quarters each year a good time, for me, to rebalance the equity side of my portfolio would be the ending of the 1st quarter or at the first to mid part of the second quarter. Then you might want to look at the fixed side of the portfolio at the end of the third quarter and perhaps rebalance again and/or load some money to equities for the traditional seasonal stock market rally which usually starts around Halloween. Equities seem to be the strongest in the 4th and 1st quarters and bonds during the 2nd and 3rd quarters, but not always.
My thoughts are that you have to have an asset allocation that fits both your risk tolerance profile and income needs. For me, this calls for an allocation range to equities from the 40% to 60% range. All along since the markets have rebounded off of the devil’s low of 666 on the S&P 500 Index … I was sixty plus percent equity at the time; and, I have dialed my allocation back by about five percent each year as the markets advanced and recovered. I am now in the mid forty percent (range) with my allocation to equities. So for me it has been an on-going process where not only have I rebalanced … I have, I feel, reduced my overall risk within my portfolio while at the same time retained a good income generation stream along with good portfolio returns over this five year time period.
My portfolio’s allocations have varied from time-to-time but usually stays within certain ranges. My current target allocation is about 20% Cash, 25% Income, 45% Equity & 10% Alternatives. Over the past couple years I have increased my allocation to alternatives and to cash as I have reduced my allocation to both equities and fixed income assets. From recollection, I think my high allocation to my income area was around 35% while my high allocation to equities was about 65%. Should we get a sizeable pull back in equities I'd most likely play the swing and reduce cash by about 5% and raise my allocation to equities by a like amount keeping fixed income the same. When I feel my equity allocation has had a good run then I'll begin to trim my equity positions back and raise my allocation to cash. Using this and some other strategies has produced an average annual total return of better than sixteen percent, for me, over the past five years while at the same time maintained an income distribution stream of better than five percent on amount invested.
So, for me, in answer to your question … I have managed my portfolio as it keeps being a work in progress and one that has evolved over time. It has some flexability in it and is reviewed and adjsusted from time-to-time based upon how I am reading market conditions.
I hope this helps you and possibly some others.
Wishing all "Happy Holdays" ... and, "Good Investing."
I was curious as to how my equity portfolio sector analysis looked compared to the S + P. I feel I am well diversified, but SHOULD the market correct more than 10% how well was i positioned ? I am 65/35 equities/bonds and cash. I am 13% foreign. In my equity portion of portfolio, I am 2:1 mutual funds to stocks. I took a look at my top 6 sectors:
Sector Slick's portfolio S + P Health care 19% 13% Technology 16% 16% Consumer defensive 13% 11% Energy 12% 11% Consumer cyclical 11% 11% Financial Services 11% 15%
I used Morningstar's XRay to extract the data. First thought was that in previous downturns, large and small, health care had much less downside (where I am overweighted vs S + P) and financial services had a higher downside (where I am underweighted vs S + P). Hopefully this slant might make my portfolio a little less volatile or have a lower standard deviation than the S + P in a downturn, assuming history can be a guide
Curious as to how others on MFO compare with similar analysis.
I have linked Morningstar’s Risk Tolerance Questionnaire that my help you with this. I feel you might need to review your asset allocation before proceeding with the other.
Just have an asset allocation you can be comfortable with, no reason to get complicated. If you think you have too much in equities, reduce it, keep more cash and it will be fine.
Thanks for your feedback, always is a welcome sight. Actually I am close to target asset allocation, a bit overweight in Healthcare and underweight in energy, but my advisor keeps me in line. Thats why I hired her, even though I knew I could manage it myself, wanted her oversight and access to lower ER on many of my funds since I can buy I shares or not pay loads on load funds. My target allocation is for a moderate portfolio., despite the fact that the equity % is higher than the average in that category. I am comfortable with it since currently am withdrawing a low percentage of my equity side . All of my bonds are in taxable portfolio (all munis) and IRA and Roth IRA are all equities. I started taking from my regular IRA this year, but only 2%, rest is from taxable account for a total of 3.5% of total holdings. I feel I am fairly risk tolerant, but do have stop losses on some of my highest performing stocks.
Thanks for posting the link. I also did the portfolio planner tool at M* and results were very encouraging, better than 95% probability my money will last
Sounds like you are good to go. And, holding 65% in equities I believe by Morningstar's allocation does put you in the low moderate range. In contrast, I fall in the top of the moderate conserative range by holding no more than 60%.
I have provided a link to the Columbia Thermostat Fund that adjust its allocation based upon the valuation of S&P 500 Index. You might learn something by doing an Xray on the fund's holdings and its positioning. It might help you with you own positioning. I reference it form time-to-time. It is currently position based upon its Fact Sheet 75% Bonds, 25% Stocks.
I thought the advice Mr. Krantz gave the investor in this financial advice column from October 26, 2007 (linked) of: "Don't worry about the bull" did not serve the investor well. If you look at the Dow closing average at the top of the page that day (may need to refresh once) the DJI stood at a then lofty 15,326. Within weeks the index would begin its harrowing decent to an intraday low of just 6,547 on March 9, 2009 - a loss of more than 50% in under 18 months. (Most risk assets like junk bonds and real estate fell in tandem.) The appropriate advice at the time would have been: "Be very much worried about current valuations." Had the investor parked all his money in cash and bought back a year or two later, he'd have benefited mightily. Even better advice would have been to invest everything in U.S. long term treasury bonds which soared during the ensuing years.
Reply to @Old_Skeet: Thanks for the links, took a look at Thermostat Fund, 75% bond is a bit high, but interesting sector breakdown on equity side. I do own one of the holdings, Columbian Contrarian Core. Good information to check from time to time to see how positions change.
I am very happy with FPA Crescent vs Columbia Flexible , same type of strategy. Be interesting to see when FPACX starts putting its unusually high cash position to work, where the money flows to.
Comments
Easiest thing for folks to do is rebalance. Folks should simply sell enough equities and buy enough bonds, cash or whatever, to bring things back into their target allocation. Not doing this can be brutal as witness the dot.com meltdown in 2000. Nas went south, what 70% and the SPX 50% (??), and if you had been riding your gains, your percentage of equities could have risen from 60% to 80-90%. And the gains were that substantial on the runnup. If you had rebalanced you would have saved 20-30%. Rebalancing should be at the minimum, an annual event. Not much different from drawing down your winnings at the casino.
Now's a very good time being the end of the year. Anyone have tax losses? I got beaten like a rented mule on my MI muni bond fund. Alas. Oh well, at least grab the tax benefit whilst I still can.
And so it goes,
peace,
rono
I agree with rono on the rebalance theme. I think this is most important and this should be done at least once a year. Since some of our strongest equity returns seem to come in the 4th and 1st quarters each year a good time, for me, to rebalance the equity side of my portfolio would be the ending of the 1st quarter or at the first to mid part of the second quarter. Then you might want to look at the fixed side of the portfolio at the end of the third quarter and perhaps rebalance again and/or load some money to equities for the traditional seasonal stock market rally which usually starts around Halloween. Equities seem to be the strongest in the 4th and 1st quarters and bonds during the 2nd and 3rd quarters, but not always.
My thoughts are that you have to have an asset allocation that fits both your risk tolerance profile and income needs. For me, this calls for an allocation range to equities from the 40% to 60% range. All along since the markets have rebounded off of the devil’s low of 666 on the S&P 500 Index … I was sixty plus percent equity at the time; and, I have dialed my allocation back by about five percent each year as the markets advanced and recovered. I am now in the mid forty percent (range) with my allocation to equities. So for me it has been an on-going process where not only have I rebalanced … I have, I feel, reduced my overall risk within my portfolio while at the same time retained a good income generation stream along with good portfolio returns over this five year time period.
My portfolio’s allocations have varied from time-to-time but usually stays within certain ranges. My current target allocation is about 20% Cash, 25% Income, 45% Equity & 10% Alternatives. Over the past couple years I have increased my allocation to alternatives and to cash as I have reduced my allocation to both equities and fixed income assets. From recollection, I think my high allocation to my income area was around 35% while my high allocation to equities was about 65%. Should we get a sizeable pull back in equities I'd most likely play the swing and reduce cash by about 5% and raise my allocation to equities by a like amount keeping fixed income the same. When I feel my equity allocation has had a good run then I'll begin to trim my equity positions back and raise my allocation to cash. Using this and some other strategies has produced an average annual total return of better than sixteen percent, for me, over the past five years while at the same time maintained an income distribution stream of better than five percent on amount invested.
So, for me, in answer to your question … I have managed my portfolio as it keeps being a work in progress and one that has evolved over time. It has some flexability in it and is reviewed and adjsusted from time-to-time based upon how I am reading market conditions.
I hope this helps you and possibly some others.
Wishing all "Happy Holdays" ... and, "Good Investing."
Old_Skeet
Sector Slick's portfolio S + P
Health care 19% 13%
Technology 16% 16%
Consumer defensive 13% 11%
Energy 12% 11%
Consumer cyclical 11% 11%
Financial Services 11% 15%
I used Morningstar's XRay to extract the data. First thought was that in previous downturns, large and small, health care had much less downside (where I am overweighted vs S + P) and financial services had a higher downside (where I am underweighted vs S + P). Hopefully this slant might make my portfolio a little less volatile or have a lower standard deviation than the S + P in a downturn, assuming history can be a guide
Curious as to how others on MFO compare with similar analysis.
https://mimadvisor.morningstar.com/public/ingrtqpage
And, another ...
http://njaes.rutgers.edu/money/riskquiz/
Old_Skeet
If you think you have too much in equities, reduce it, keep more cash and it will be fine.
Thanks for your feedback, always is a welcome sight. Actually I am close to target asset allocation, a bit overweight in Healthcare and underweight in energy, but my advisor keeps me in line. Thats why I hired her, even though I knew I could manage it myself, wanted her oversight and access to lower ER on many of my funds since I can buy I shares or not pay loads on load funds. My target allocation is for a moderate portfolio., despite the fact that the equity % is higher than the average in that category. I am comfortable with it since currently am withdrawing a low percentage of my equity side . All of my bonds are in taxable portfolio (all munis) and IRA and Roth IRA are all equities. I started taking from my regular IRA this year, but only 2%, rest is from taxable account for a total of 3.5% of total holdings. I feel I am fairly risk tolerant, but do have stop losses on some of my highest performing stocks.
Thanks for posting the link. I also did the portfolio planner tool at M* and results were very encouraging, better than 95% probability my money will last
Sounds like you are good to go. And, holding 65% in equities I believe by Morningstar's allocation does put you in the low moderate range. In contrast, I fall in the top of the moderate conserative range by holding no more than 60%.
I have provided a link to the Columbia Thermostat Fund that adjust its allocation based upon the valuation of S&P 500 Index. You might learn something by doing an Xray on the fund's holdings and its positioning. It might help you with you own positioning. I reference it form time-to-time. It is currently position based upon its Fact Sheet 75% Bonds, 25% Stocks.
https://www.columbiamanagement.com/content/columbia/pdf/LIT_DOC_3C97987F.PDF
And another fund ... Columbia Flexible Capital:
https://www.columbiamanagement.com/content/columbia/pdf/LIT_DOC_F24B6B3A.PDF
Hope things go well for you.
Old_Skeet
Thanks for the links, took a look at Thermostat Fund, 75% bond is a bit high, but interesting sector breakdown on equity side. I do own one of the holdings, Columbian Contrarian Core. Good information to check from time to time to see how positions change.
I am very happy with FPA Crescent vs Columbia Flexible , same type of strategy. Be interesting to see when FPACX starts putting its unusually high cash position to work, where the money flows to.