Why Do You Want To Sell? 6 Strategies To Beat A Market Slump

A Gloomy Forecast

So it looks like we’re heading into a tough time for markets. Economic indicators seem to be pointing towards an economic slowdown. This could lead to a recession one thing for sure none of this is good for markets. In 2018 we saw the worst market performance in a decade with all US markets down, as were most European and Asian indices. From all indications 2019 isn’t looking any better. Rising interest rates, European uncertainty and US-China trade tensions all impacting the global economy.

The likelihood is that your Q4 valuations aren’t looking quite so good. For some of you this may be starting to make you nervous whilst for others are less concerned. Though if we have another 12,18 or 24 months of this what then?
 
There’s going to be a lot more of you feeling nervous and some who’ve got out of the markets altogether. Others will ask their portfolio managers to move into something safer. So why would you sell your investments?
 

starting to make you nervous

What's Motivating You?

Well that’s easy, because they’re losing money stupid! If we sell them now we can stem the flow of losses and we can move them into something safer. Then when markets get better we can move back into them. You may be having a similar conversation with your portfolio manager. Or even expect them to be moving your portfolio around so it’s still making money. Even when markets are falling they should be able to keep making you money, right!

is it that simple?

Well as you’ve probably guessed the answer to that is no, it really isn’t that simple. Let’s start by addressing the expectation that a portfolio shouldn’t go down.
 
First of all chopping and changing a portfolio costs money.
 
Second if share markets are falling then they’re falling with few exceptions.
 
If you think that your adviser has a sixth sense when it comes to financial markets, then you need to know that they don’t. If they suggest that they can give you growth in all conditions, then find a new portfolio manager. That’s because they’re not being honest with you or themselves.

Getting it right from the start

Making sure that you have good foundations will work to your advantage. Here’s a list of fundamentals that should be at the heart of all the investment decisions that you make:
 
Let’s start by saying make investments according to the time you have. We’ll go into more detail on this later needless to say it should be at the top of your priority list.
 
Hold high quality assets that are transparent and you can understand what they do.
 
The majority of investments you have should produce income as well as capital growth.
 
Keep investment costs to a minimum, so you’ve got more fat to fall back on when hard times do come.
 
Accept that there will be times when your portfolio will go down and there is little you can do about it.
 
Always rebalance you holdings at least once a year.
 

good foundations will work to your advantage

Time

What do we mean by this? Well if you don’t have time to wait for an investment to recover then you shouldn’t be investing in it. If you’re going to need the money soon then don’t put it into something that can fall in value
 
So if you don’t need the money then what’s your problem?  It comes down to fear of loss and not understanding your investments. We’ll talk about this later when we talk about accepting that investments will go down.
 
If you do have time to wait say 10+ years before you need to touch the money. Then you should be investing in assets that bring more growth. What comes with that is the potential for short term loss. Though if you have time you can wait these rocky periods out.
 
Sticking money into a bank account is going to do little towards funding your retirement. You won’t build wealth with assets that pay interest only. All that’s happening is you’re keep your money safe for now or so you may think. In reality when you come to need the money it  will buy you a lot less because inflation’s devalued it.
 
Markets recover, you need to be able to afford to let them. This is why time is so important.

quality assets

This may sound stupid, though in reality people invest in things they don’t understand. They invest in assets that provide predictable returns because they don’t want to see valuations drop. What they don’t realise is that often these assets can be much riskier than they appear.
 
What do we mean by this though, you may have little of no investment knowledge. How can you make sure that what you invest in is good quality?
 
Here are some pointers to help you:
 
The management team should have history and there needs to be consistency within it.
 
A high rating from the fund research firms such as Morningstar, FE, Lipper or Citywire.
 
Low portfolio turnover ratio, this helps to keep the funds costs down. It can also mean that a manager is very fussy about the assets that they buy. It also indicates that they are confident in what they buy and will give it time to work.
 
Make sure that the fund is Daily Traded. This means that you can get in and out on a daily basis. This shows that it has good liquidity, an extremely important when investing.
 
Reasonable fees are also important as this will impact long term performance. Look at averages amongst the managers peer group how do they compare.
 
We talked about a fund being transparent and this applies to both cost and structure. Make sure that fees are clearly disclosed and straightforward. Also they shouldn’t have large upfront fees or surrender charges.
 
You should also be able to understand what they do or your portfolio manager should be able to explain it to you. If you don’t or they can’t then don’t invest into it.
 
 
 
Make sure that there is a clear and accurate basis for the funds valuation. If it’s determined by the fund manager or it is difficult to value the underlying assets of the fund then keep away!
 
For example an index tracker copies the holdings of an index such as the FTSE 100 or the Dow. Another fund may manage a share portfolio of Large to mid sized Japanese companies. Both of which are easy to understand without going into technical details.
 
Making sure that you have good quality assets is important for obvious reasons. Though less obvious is the fact that such an asset will be in a better position when markets recover. This is because the fund manager won’t have panicked when markets were tough.

Growth & income

When we invest we can focus only on the growth aspect of the asset. When markets take a turn for the worst then the growth will dry up and we can incur losses. Having assets that also produce income during these periods is important.
 
One reason is that it helps to offset any losses that you incur when markets fall.
 
If we reinvest the income it will help the portfolio recover quicker. This is because we are buying more shares/units in the fund cheaper. As and when the markets start to grow again  we get back to where we were much faster.
 
If we reinvest the income when times are good it also gives us more resilience in the lean periods.
 
Shares, bonds and property based assets all pay income. You wouldn’t buy an investment property and then not rent it out would you.
 
Having too many assets that don’t produce income is an issue when markets start to fall. You’ll end up feeling the downturn far more.

it's rare for an employer to include maternity benefits

keeping costs down

There is always a cost to investing, no one is going to do it for free. Nor should you expect them to. Even the champions of low cost investment at Vanguard have charges.
 
If you want your portfolio managing for you then you will pay more. If this is the case then you may want to think about using a multi-manager fund. They’ll get institutional rates on the underlying assets. You’ll also get professional portfolio management cheaper than a discretionary manager.
 
If you are happy to manage it for yourself then you are going to pay less. You’ll have more work to do and this isn’t for everyone.
 
Whatever you decide it’s important to keep investment costs as low as possible. If costs are too high then it will eat into your growth.  It can wipeout your gains  completely. When markets do start to fall you’re going to feel it even more.
It’s much like a bear eating as much as it can in the summer to build reserves for the winter. When bears hibernate they’ve built up their fat for the winter. If they don’t get enough food they may not see the spring. Minimising investment costs will give you more fat to see you through the lean times.
 
Any investment strategy has layers of costs though some more than others. Holding direct funds can be a cheaper option. It’s worth noting though that every fund company has their strengths and weaknesses. This could mean that you lose out on growth.
 
An investment platform can provide both choice and keep costs low. Not all platforms are equal so it is important to make sure that you get the right one for you.
 
If you want to keep costs low we’d suggest that you avoid the offshore life assurance products. As time has gone on much more cost effective options have become available.

Acceptance

All markets go up and down in the short term and some of these shifts look dramatic at the time. Over the longer term these movements flatten as markets recover and move on. This means that the shorter time you have in the markets the less chance you have of making money. Conversely the more time you have in the market the more chance you have of making money.
 
You often hear people say that investing in stock markets is too risky. What they mean is that they don’t have time to or aren’t prepared to wait for them to recover. When an investment falls in value then losses become real only when we make them real. We do this by selling the assets before they have recovered and crystallising the losses.
 
There are situations when you may have a bad investment that goes wrong and you want to get out of it. You should! Though if you’ve got quality assets in the first place then this won’t be an issue.
The very same people will invest in property and if the value of that asset were to fall would they sell it? Of course they wouldn’t, they’d give it time to recover. They’d explain that they were still getting rental income so everything was OK. There isn’t any difference between owning a fund and a property, the same principles apply to each.
 
All markets recover, there hasn’t been a market crash that hasn’t recovered. Over the long term with dividend reinvestment equity markets provide the strongest growth.
 
If you accept that markets go up and down, don’t panic and stick to your strategy. You’ll be fine.

rebalance

What is rebalancing and why is it so important?
 
When your portfolio is set up there should be an allocation model that it meets. This model defines the percentage split of how you invest your money. Over a year these assets will grow at different rates. Some will grow more than others and some may even incurr losses. This means the portfolio doesn’t meet the asset allocation model. It also means that the risk profile of your portfolio is different. You could be taking on more or less risk than you would like.
 
When we rebalance, we bring the portfolio and the risk profile back in line with the original model. We do this by selling assets that had strong performance and buying those that have lost money
Rebalancing helps us lock in the gains from the holdings that’ve grown. It also helps us make sure that we buy those that have lost at the lower price. This in turn means those losers don’t have to recover completely before we’re making money again.
 
If you’re managing your own portfolio this is an important part of doing a proper job. Once a year is enough anymore than this is overkill any less could prove costly.
 
If you’re using a managed fund or discretionary manger then they should be doing this for you. If your financial adviser runs your portfolio insist they rebalance every 12 months.

What is rebalancing & why is it so important?

Why you shouldn't sell

The likelihood is that you’ve started to make losses and that’s why you want to sell. No one sells when their portfolio is going up. You may have concerns that prices could fall further and you know what they may do that. As we mentioned earlier if you have quality assets they’ll recover.
 
Where else will you put the money? If you leave it in the bank then you’re not going to recover the losses. By the time you invest again then you’ll only do it when markets start to recover. The thing is you’ve already missed a good part of the upside.
 
So wait, let it recover if you’ve taken the steps above you’ll be fine.
 

you've already missed a good part of the upside.

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