Time to get cashed up?

[sackofspuds]

I'm seriously thinking of disposing of underperforming shares, taking profits on some of my heavier weight ones and getting cashed up ready to buy in case the market turns south in a serious way.

Yes, I know this goes against what the likes of Terry Smith from Fundsmith says, ie, wrong to try to time markets but I just get the feeling that it could all turn south soon and I'd feel a fool later if I acted like a rabbit in the headlights.

Anyone else moving to cash? If so, what kind of percentage?

I've probably been reading too much Ambrose Evans-Pritchard articles like this one (sorry, premium article):
https://www.telegraph.co.uk/business/20 ... it-debate/

Do not be fooled by the current recovery. Extreme monetary stimulus has papered over the deformed structure of monetary union. It has bought time but that time has been squandered.

Ambrose is one of those economists who predicted nine out of the past five recessions but he's concerned about the affect of US interest rate rises on the $25 trillion market for offshore dollar loans and derivative contracts. Turkey would be a canary in the coal mine here. He also points to money supply growth stalling.

As he points out, this time the central banks don't have the 500 basis points of interest rate cuts needed to stop a recession.

In the Eurozone especially, QE is maxed out. Politically, the Germans won't allow any more of it for one thing yet the likes of Italy don't have any other buyers for their government debt. Add to this that public debt levels in Spain, Portugal and Italy are far worse than at the time of Lehman.

[Urbandreamer]

I'm seriously thinking of disposing of underperforming shares, taking profits on some of my heavier weight ones and getting cashed up ready to buy in case the market turns south in a serious way.

I have actually done that, sort of.

I normally run my portfolio as 100% equities. I top sliced some of my better performing holdings and disposed of some that I should have cut years ago. I'm now 8% in cash. Ok many would say that is still very heavy on the equity side, but it's a huge move for me. I'm still contributing to my SIPP, but not actually using the cash to buy shares.

What I now need to do is figure a relatively safe alternative to cash (I really DON'T like cash).

Another problem that I have is that I've started and funded S&S JISA's for my kids. I'm going to have to invest that money even though I suspect that I'll be able to get a better deal some time later.

[Dod101]

You can always make a case for cash and to some extent it depends on your timescale. But remember the perma bears like Personal Assets. They always miss out on the upside because of course in the long run markets have risen much more than they have fallen so I remain and will remain more or less 100% invested except for my 5 years or so of income in Index Linked NSCs. That is though more asset allocation than simply a reserve.

Not just Terry Smith says you cannot time the market; it is pretty well accepted that you cannot, although of course sometimes you will be lucky.

Dod

[tjh290633]

I believe in staying fully invested. That way you maximize your dividend income, which is my main objective.

Reinvesting accumulated dividends at lower prices is also good at enhancing income.

TJH

[GoSeigen]

I believe in staying fully invested. That way you maximize your dividend income, which is my main objective.

Reinvesting accumulated dividends at lower prices is also good at enhancing income.

This is problematic because you will never have accumulated dividends to reinvest if you stay fully invested. Unless stretching the meaning of the word "accumulate" or "fully".


Personally, I never base any investment decision on the hypebolic rhetoric of AEP.


GS

[MaraMan]

I am usually 100% invested in equities, however I took the 25% tax free cash out of my SIPP when I formally retired a month ago, which has proven to be fortuitous. I am not going to rush back into equities but will drip feed this sum in I think, but of course as we all know there is no point in trying to time the market. Bit of a dilemma.
MM

[Chrysalis]

The problem of cashing out is deciding when to go back in.
All the evidence that I have read suggests that remaining invested at your chosen asset allocation throughout market ups and downs is the best course of action. And that private investors' tendency to churn their portfolios generally reduces returns.
I think anyone investing in equities must understand that very large reductions in value can and do happen regularly, they should be expected, and therefore it would be wise to have decided a plan in advance rather than reacting to market movements.
My plan is to keep invested as per asset allocation, with annual rebalancing. (I am writing this to remind myself, should panic set in when the next 40% drop in the market happens).

[Chrysalis]

I am also only 50% equities with the rest in cash and bonds.

[MaraMan]

Not wishing to hijack this thread but I am considering investing in bonds but am concerned about what I have read about their future in a rising interest rate environment. Should I be concerned? Are their any Bond investment trust recommendations (probably should ask that on the IT board, apologies)?
MM

[moorfield]

I'm seriously thinking of disposing of underperforming shares, taking profits on some of my heavier weight ones and getting cashed up ready to buy in case the market turns south in a serious way.

It's never too difficult to find contrary opinion in the financial press:

UK equities are more undervalued compared to their US and global counterparts than at any point over the last several years, according to new data.

http://www.cityam.com/283366/uk-stocks- ... l-equities

So it depends what you mean by "underperforming" ie. what are your (long term) objectives and how are you measuring progress against? Or is it just a case of twitchy hands and feeling the need to do something?

[hiriskpaul]

Personally I would not take any notice of what Ambrose says, or any other economist for that matter, but if you do want to try your hand with market timing, there are some systematic ways of going about it that do appear to generate good and statistically significant risk adjusted returns. Meb Faber's is one of the simplest and better known:

http://mebfaber.com/timing-model/

His very simple strategy is to sell when the total return of the S&P 500, or whatever is below the 10 month moving average (sampled monthly) and buy when it is above. There is a 10 year out of sample review of his original paper (which I have not managed to see yet) and apparently the approach has beaten the S&P over the period, despite the long bull market. I suspect the reason is that the strategy got out of the market on the way into the financial crisis. It may not look so good once that bear market falls out of the 10y figure.

I keep 25% in global equities (mostly cap weighted ETFs/trackers), but if I used my judgement I would probably be at 0%. However, I don't trust my judgement. Some clever person once said if you like everything in your portfolio, you are not diversified and Ben Graham advised keeping at least 25% in equities regardless of what you thought of prices and prospects.

If I was going to hold a lot more than I do in equities, I think I would probably follow some systematic strategy such as Faber's with part of the allocation as some timing strategies do seem to reduce losses during major market drawdowns. The price to pay, there is always a price, is that some buy and sell signals will turn out to be false alarms.

[gbjbaanb]

Not wishing to hijack this thread but I am considering investing in bonds but am concerned about what I have read about their future in a rising interest rate environment. Should I be concerned? Are their any Bond investment trust recommendations (probably should ask that on the IT board, apologies)?
MM

Usually bond funds in a rising-interest rate environment don't do too badly, they just don't do quite as well. Bear in mind bond funds will be buying more all the time, and new bonds in rising interest rate environments will be coming with higher yields, so overall there's far less impact than you'd think.

Bonds will never make you rich though, but as a capital preservation strategy, they're the best we have. You could invest in some capital-preserving trusts and let them figure it all out (such as CGT, Personal Assets, Ruffer - see this thread). Incidentally, when economists talk about "cash", they really mean gilts, so all those numbers about equities vs cash, they're really showing equities vs gilt returns, not cash stuck under a virtual mattress which is the effect of us "holding cash" in our accounts.

I sold out a lot at Christmas, wish it'd been earlier! and there's the rub - if i couldn't determine the best time to exit, how will I determine the best time to enter the market. The answer obviously is that its impossible to do so, and that's why they say you shouldn't get out completely. Missing the best upturns (that occur very rapidly) is worse than being invested during the downturns (apparently). The free ebook "Monkey with a Pin" mentions this with some numbers (hmm, it used to be free, can't find a link now)

[bungeejumper]

I transferred eight of my nine pension funds(**) into a Hargreaves Lansdown SIPP last November, and took the 25% tax free, and three quarters of the remainder is still in cash today. Nope, I couldn't find anything I thought was strong enough, apart from energy (and my ISA is already stuffed with that).

Some time around February 2018 I finally relented and put a quarter of the money into global trackers and a Japanese and a Chinese IT, and so far that part of the SIPP's down around 4%. Which was still less than what I'd have lost on the S&P 500. But that's not quite the point.

Having a large (75%) wodge of cash does concentrate the mind quite wonderfully. And yes, I do know that my chances of catching an uptrend when it comes are no better than anybody else's. Which could turn out to be a bad error on my part. But as long as the cyclically adjusted P/E on the S&P is above thirty (and that's twice its historical average, remember), and as long as Trump is playing blockbuster daytime TV games with the world's economic expectations, I'm going to stick to my guns and stay cautious.

Nuff said. But what did I do with my (**) ninth pension fund? Nuffink! It's invested in a pre-1986 with-profits fund, and although its growth is slow, it can only ratchet in an upward direction. I like to think of it as a storm anchor. Going to keep it that way.

April can be a cruel month. Let's see where we are in five months' time, with the US mid-terms looming.

Best to all.

BJ

[OhNoNotimAgain]

Most of the global financial industry wants you to do something, anything, because that is how it gets paid.
And when I say "the industry" I include the press, websites and platforms and sundry supposed economic experts; the ones that predicted all the crises except the GFC in 2008.

Hardly anybody wants you to invest across the market for a decade or so, reinvesting the dividends, so you can can do something productive; like fishing.

[dspp]

.......if you do want to try your hand with market timing, there are some systematic ways of going about it that do appear to generate good and statistically significant risk adjusted returns. Meb Faber's is one of the simplest and better known:

http://mebfaber.com/timing-model/

His very simple strategy is to sell when the total return of the S&P 500, or whatever is below the 10 month moving average (sampled monthly) and buy when it is above. There is a 10 year out of sample review of his original paper (which I have not managed to see yet) and apparently the approach has beaten the S&P over the period, despite the long bull market. I suspect the reason is that the strategy got out of the market on the way into the financial crisis. It may not look so good once that bear market falls out of the 10y figure.

I keep 25% in global equities (mostly cap weighted ETFs/trackers), ..........If I was going to hold a lot more than I do in equities, I think I would probably follow some systematic strategy such as Faber's with part of the allocation as some timing strategies do seem to reduce losses during major market drawdowns. The price to pay, there is always a price, is that some buy and sell signals will turn out to be false alarms.

Thank you for this.

I had a bit of spare time today and read that updated paper you cited which can be downloaded here:
https://papers.ssrn.com/sol3/papers.cfm ... _id=962461

The motivation can be summed up as:
1. Diversification is good, but not enough.
2. LTBH through serious down-periods sucks.
3. So find something to take emotion out of the timing of the sell and buy decisions.

A quote stuck out for me " The former manager of the Harvard endowment, Mohamed El-Erian stated in Kiplinger’s in 2009, “Diversification alone is no longer sufficient to temper risk. In the past year, we saw virtually every asset class hammered. You need something more to manage risk well.”"

It uses two rules as you say:
BUY RULE: Buy when monthly price > 10-month SMA.
SELL RULE: Sell and move to cash when monthly price < 10-month SMA.

I then ran this through the four Vanguard funds I use, and two of the other big & large cap positions I have, and got the following results. Note I am using the staus nomenclature of being IN or OUT, and the last change date (ie. when last SOLD or BOUGHT):

Item | Status | Turned  
=    | =      | =      
VUKE | out    | 01-Feb-18
VERX | out    | 01-Feb-18
VAPX | out    | 01-Mar-18
VWRL | out    | 01-Mar-18
=    | =      | =        
RDSB | in     | 01-Apr-18
BP   | in     | 01-Apr-18

Looking at that, and the underlying trends in each of those charts (I just used HL with the 200d SMA switched on, with a 3yr monthly view), I do slightly wonder if there should be an intermediate status IN-HOLD-OUT to prevent too much churning. However the back testing, and post-testing, they have done shows that even the two-status version has so-far been providing increased returns compared with LTBH. It is certainly food for thought that all four of those indices have a sell signal on this basis.

Do any Fools have views on these systems ? Are any Fools using them ? What experiences have you had ?

regards, dspp

[Urbandreamer]

but over very long periods that all tends to wash.

VERY long periods?

Sure I am quite familiar with the Barclays gilt/equity study, however in counter point, the FTSE 100 is worth exactly what it was some 18 years ago. Possibly worse for your buy and hold inestor, rather than index tracker, is that 49 of those 100 firms no longer exist.

I got out during the dot-com crash at the top, but got burnt during the financial crisis. I just didn't see it comming and didn't believe that is could be as bad as it was.

I wouldn't advise rapid large portfolio re-allignment, but I've done it in the past and currently am very dubious that "most" companies will do well over the next 5 years. I'm going to be sitting on my hands as regards buying for myself for some time, and yes, selling when I feel appropriate.

I'm now up to 12% cash, though that change is due to me getting fed up of the GKN takeover stuff and selling my shares on the market.

[tjh290633]

I believe in staying fully invested. That way you maximize your dividend income, which is my main objective.

Reinvesting accumulated dividends at lower prices is also good at enhancing income.

This is problematic because you will never have accumulated dividends to reinvest if you stay fully invested. Unless stretching the meaning of the word "accumulate" or "fully".

Personally, I never base any investment decision on the hypebolic rhetoric of AEP.

GS

It's funny then, how I managed to reinvest dividends and other cash arisings 15 times in the last financial year.

TJH

[dspp]

0. I had a further read through the links:
http://mebfaber.com/timing-model/
https://allocatesmartly.com/blog/
https://allocatesmartly.com/on-the-dive ... -tactical/
https://extradash.com/en/

1. Surely switching shares < > bonds is not that different than switching shares < > cash. In fact reading the Meb Faber paper he makes a point about cash being worse than short dated bonds somewhere.

2. But reading around - which had a lot of deja vu about it, I've obviously done this trip before - there are a lot of mechanical timing strategies out there, all of which have been backtested in what hindsight may show were benign circumstances. Some of the future may be represented in the past, but not all.

3. But to go back to my question. Are/have any Fools practical experience of these mechanical market timing strategies ? and what were the opinions you formed as a result ?

regards, dspp

[hiriskpaul]

Do any Fools have views on these systems ? Are any Fools using them ? What experiences have you had ?

Never used any, but looked into many down the years. All these stratagies suffer to a certain degree from overfitting. Worst of all in this respect seem to be those based around market valuation, such as p/b or CAPE. The strategies I looked at all failed miserably when tested out of sample. CAPE and/or p/b do give some indication of likely future returns, but I have yet to see any testable strategy that successfully uses them as timing signals.

Simple, periodic rebalancing seems to work well at improving risk adjusted returns, but not necessarily overall returns, provided the asset classes are reasonably uncorrelated. I think is very well known and established.

I was very suspicious at suggestions of using SMA crossings in long term investment strategies, but they do seem to work. Or at least my mind is still open to the possibility that it is not all nonsense. There are a few anomalies though which hint at overfitting. For example, almost all the strategies use monthly, quarterly or year end data, but the strategies often don't seem to do so well when tested on data sampled on say the 15th of each month. I cannot think of any rational explanation for things like that other than overfitting.

Initially I thought along the lines that 1nv35t has mentioned. In particular, if you are out of the market 30% of the time you are almost certain to see lower long term volatility, so that risk reduction aspect is a given. But the strategies do seem to do better over long periods than simple periodic rebalancing. In a way it is a little unfair to make the comparison as well, as you don't actually know the percentage split between being in and out of the market until the end of the period.

Whether the stratagies are psychologically easy to follow is another matter. If you are 10% down on the last buy and get a sell signal would you sell? Or break the rules and hope to see some of your money back before you sold? Similarly if you were out of the market during a severe downturn and got a buy signal, which you really want to switch to being all in? These same kind of issues can apply to simple periodic rebalancing as well.

[GoSeigen]

I believe in staying fully invested. That way you maximize your dividend income, which is my main objective.

Reinvesting accumulated dividends at lower prices is also good at enhancing income.

This is problematic because you will never have accumulated dividends to reinvest if you stay fully invested. Unless stretching the meaning of the word "accumulate" or "fully".

Personally, I never base any investment decision on the hypebolic rhetoric of AEP.

GS

It's funny then, how I managed to reinvest dividends and other cash arisings 15 times in the last financial year.

TJH

So you cleared out your cash roughly every three weeks. In most people's books that doesn't amount to "accumulating dividends" to reinvest at "lower prices". It does count as staying fully invested for sure.

GS