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

Tuesday, 22 January, 2019

why stormy markets aren't
such bad news for you

a gloomy forecast

So we’re in a period of market uncertainty. This means that we’re seeing a lot of volatility in asset prices.
Economic indicators seem to be pointing towards a slowdown. Many economies are moving into recession whilst others teeter on the edge.
In fact the past few years haven’t been great in terms market performance since the post pandemic bounce back. And this is the case for markets around the globe US, European and Asian markets all experiencing daily swings.
Interest rates continue to rise in an attempt to combat stubborn inflationary pressures Tensions and uncertainty in Europe and Asia continue to affect the global economy.
The likelihood is that your investment  valuations statements aren’t looking quite so good.  And For some of you this may be starting to make you nervous whilst 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?

what's motivating you?

Well that’s easy, because you’re losing money!
If we sell them now you can stem the flow of losses and you can move them into something safer.
Then when markets get better you 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!

is it really that simple?

Well as you’ve probably guessed the answer to that is, No!
It’s not that simple at all really.
Let’s start by addressing the expectation that a portfolio shouldn’t go down.
If you think that this is a realistic expectation then we’re sorry to burst your bubble, simply put it’s not possible.
Recently, with exception of energy prices and industrial commodities asset prices have been falling. Even energy prices have given a chunk of those gains back over the past few months.
Equities, debt, precious metals and even the invincible property market have all seen losses.
So if you’re investing even in a cautious portfolio then you’ve got holdings that are now worth less.
Your portfolio is made up of equities, the broad share markets are falling then most sectors are going down as well. There aren’t too many exceptions.
The other thing that you need to consider is that the act of selling and buying assets is going to compound the situation even further
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.
We may look at conditions and indicators then come to a solid conclusion on what’s going to happen and that’s perfectly reasonable. The issue is when exactly what we’re predicting is going to happen actually happens.
That’s because it invariably doesn’t happen when we expect it to and then other factors can have an influence.
This point answers a common opinion that many of you may also have. That is why aren’t we moving into cash until market’s start to recover.
Cash isn’t the solution that you might think it is, especially when we have high inflation as we do right now. You don’t have the possibility of higher gains and in real terms you’re losing money because your spending power is being eroded.
The other big issue with going to cash is that when markets do start to recover, you’ll miss out on it. You’re only going to invest again once you feel comfortable again and this really isn’t the best for your portfolio.
We’re going to take a look at the things that you can do to shore up your portfolio to get through these tough times…
Before that, if you want to know more about the do’s and don’ts of expat wealth creation then “Click Below” for our “Expat Money Series

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getting it right from the start

Making sure that you have good foundations will work to your advantage in the long run.
Here’s a list of fundamentals that should be at the heart of all the investment decisions that you make:
  1. Invest Appropriately For Your Timeframe
  2. Hold High Quality Assets
  3. Look For Holdings That Produce Income As Well As Capital Growth
  4. Keep Investment Costs To A Minimum
  5. Accept That There’ll Be Times When Your Portfolio Value Goes Down
  6. Rebalance Your Portfolio 
Now we’re going to look at each one in more detail.
We’ll explain what we mean and give you details on the practicalities of implementing them.

investing for your timeframe

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 to use 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 with falling markets?  
It comes down to fear of loss and not understanding your investments properly.
We’ll talk about this later in more detail when we talk about accepting that investments will go down from time to time.
If you do have time to wait say 10+ years before you need to touch the money you intend to invest. 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 in a bank account is going to do little towards funding your retirement. You can’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’s going to  buy you a lot less because inflation’s devalued it.
Whilst markets fall they also recover, you need to be able to afford to let them do that.
This is why investing for your timeframe is so important.
The shorter the time is before you need to use that money the more conservative the investment strategy. The more time you’ve got then look for assets that give you greater returns.

High Quality Assets

This may sound stupid, though in reality people invest in things they don’t understand.
If you invest in assets that provide predictable returns because you don’t want to see valuations drop. What you’re not realising is that often these assets are much riskier than they appear.
What do we mean by this though?
Quite often the funds that have very predictable returns do so because of the way the underlying assets are valued. The underlying assets are given notional prices because they’re difficult to value. They’re difficult to value because they’re not easy to sell because there’s a limited secondary market for them.
If large amounts of money are withdrawn from such funds then they have to sell assets to meet these obligations. The underlying assets aren’t easy to sell so such funds have to suspend trading. That means you can’t get your money out.
When the assets are sold they’re well below the notional valuations that they’ve been given. This means that the funds value starts to fall and you can’t get your money out of it.
This is known as liquidity risk! 
You may have little or no investment knowledge. So, how can you make sure that what you invest in is good quality?
Here are some pointers to help you:
  1. If you’re using funds then make sure that the management team have history and the members have been consistent.
  2. Look for a high rating from the research firms such as Morningstar, Financial Express (FE), Lipper or Citywire.
  3. If the fund has a low portfolio turnover ratio then fund costs will be lower. It also indicates that a manager is very particular about the assets that they hold and are true to their investment strategy and give assets time to work.
  4. Make sure that the funds that you hold are daily traded, which means that you can buy and sell each trading day. We talked about liquidity risk earlier using daily traded funds eliminates this because such funds can’t meet this and are therefore monthly traded.
  5. Using investments that have a reasonable fee structure is important to long term performance. Judge this by looking at the average fees in the managers peer group and see how they compare.
  6. Funds must be transparent in both it’s fees and also their structure. You should understand the costs and make sure that they are clearly stated. Also there shouldn’t be any large upfront or exit charges.
  7. You should also be able to understand how the fund makes money or your portfolio manager should be able to explain it to you. If you don’t understand how the fund is making money for you then don’t invest in it.
  8. Make sure that there’s a clear and accurate basis for the funds valuation. If this is determined by the fund manager or the underlying assets are difficult to value, then keep away.

These are some sound principles to ensure that you’re investing in high quality assets right from the start. 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.

income and growth investment strategy

You may think that focusing your strategy on growth is your best option. This means that you focus solely on the price movements of the asset.
The issue with this is that when markets take a turn for the worst then the growth will dry up for a period of time and we can incur losses.
Also focusing on assets that produce income as well is important during these periods.
One reason is that it helps to offset any losses that you incur when markets fall.
Also, 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.

keeping investment costs to a minimum

There is always a cost to investing, no one is going to do it for you for free. Nor should you expect them to do it either.
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 that 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. Once again as markets struggle a portfolio with high costs will feel the impact 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.

accept markets for what they are

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!


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 incur losses.
This means the portfolio no longer meets the asset allocation model. It also means that the risk profile of your portfolio has changed.
You could be taking on more or less risk than you would like.
When you rebalance, you bring the portfolio and the risk profile back in line with the original model.
You do this by selling assets that had strong performance and buying those that have lost money
Rebalancing also helps you lock in the gains from the holdings that’ve grown. And  helps you make sure that you buy those that have lost at a lower price.
This in turn means those losers don’t have to recover completely before you’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.

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why you shouldn't panic and sell

The likelihood is that you’ve started to make losses and which is  why you want to sell.
No one sells when their portfolio is going up. You may have concerns that prices could fall further.
As we mentioned earlier if you have quality assets they’ll recover.
Where else would you put the money?
If you leave it in the bank then you’re not going to recover the losses anyway. By the time you invest again then you’ll only do it when markets start to recover. And you’ll have missed  a good part of the upside.
So wait, let it recover if you’ve taken the steps above you’ll be fine.
And if you can’t afford to wait for them to recover, sorry but you shouldn’t be investing that money into those assets in the first place

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