scotia wrote:
There was a sharp downward correction in March 2020, followed by a substantial rise which was most striking in the growthiest trusts.
In spite of the downward correction, In the past 3 years a Vanguard world tracker (VWRL) has increased by 41%, while Scottish Mortgage (SMT) has increased by 141% and the cautious Personal Assets (PNL) has increased by 27%. In general, income IT's fared badly compared to growth or generalist IT's.
So when will the next downward correction occur, and what investment sectors will be most affected? In my opinion, that's entirely guesswork. I keep a reasonable spread of equity investments, and ignore fluctuations.
For those of us who's investing history covers the years since 2000, we've been 'blessed' with three pretty brutal, although relatively short-lived market corrections -
1. Dot-com bubble bursts (2000 to 2003 - FTSE loses 47% over three years before starting to recover)
2. Global Financial Crisis (2007 to 2009 - FTSE loses 45% over 18 months before starting to recover)
3. COVID (2020 to present - FTSE loses 33% over two months before a fairly sharp rebound)Those three periods give us a good set of 'stress tests' against which we can position our investment strategies and 'downturn coping mechanisms', with a clear ability to then add in additional scenarios or time-scales to give some margin.
For my own stress-tests, and as someone who's primarily focussed on an income-strategy based largely on income-related Investment Trusts, the assumptions might look something like this -
1. Period for coping strategy to manage will be five years (so some margin over the above periods, the longest of which was three years)
2. During that five-year period, portfolio income will drop to 50% of previous levels
3. After 5 years, portfolio income will have returned to previous levels
4. Spending will be required to be 'normal' throughout that five-year periodSo on my assumptions, we've basically got 5 years through which we've got to cope with a halving of portfolio-generated income with the above scenario, and that means that there's got to be at least 2.5 years worth of 'normal-level income' that needs to come from
somewhere else - that's the '
coping strategy' pot, which for me includes a level of near-cash funding held in Premium Bonds, along with some additional sources of cash or near-cash funding, and I actually currently plan on holding a
three-year reserve, although I'm also very concious of the following two points -
1. Most of my income-related Investment Trusts operate a dividend-cover policy
of their own, which amounts to some degree of 'double counting' of coping strategies - I see this as a 'good thing' however, as it means that I'm hopefully
over-egging my scenario above where I'm assuming a 50% drop in portfolio-generated income for the full five-year period. A 'back pocket benefit' if you like, to my overall coping strategy, and one that's been quite visibly acted out during the recent COVID period, where the vast majority of income-IT's have seen no drop in generated dividend income at this point...
2. The past 18-months of COVID related issues has taught me one great lesson in terms of being able to still have a *relatively* comfortable time,
during a period where my actual spending levels have been curtailed quite dramatically, and if I wasn't working at that point and I was reliant on my investment returns, then I am quite happy to accept that there would probably be a relatively quick 'tightening of the belt' in terms of
actual spending if my portfolio income were to take a large hit, and so that's given me an
additional 'back-pocket benefit' of also knowing that if such a market-dislocation were to occur in the future, I would probably be unlikely to just 'carry on as normal' anyway, from a spending point of view, for some period at least..
It's hopefully clear that the above doesn't take too much account of inflation, which is the elephant in the room at this time of huge monetary expansion, of course, but I'm relatively content that there's some wriggle-room in my coping-strategy margins that will cope with *some* level of higher inflation for moderate periods of time, and for me there comes a point where any real doomsday-scenarios that I'm likely to come up with regarding very long-term or very high inflation (or both!) is likely to be so disruptive to wider sections of society anyway, that they'll hopefully either be curtailed by Government intervention at some level, or else we're likely to be so well into '
guns & beans' territory by then that all the above becomes somewhat academic, and we'll be fighting it out in the
Mad Max Thunderdome for supper anyway...
So for me, this is less about
re-positioning at portfolio level to cope with some *imaginary* future market-dislocation scenario, and just making sure that
outside of the actual portfolio, there's things in place that are hopefully likely to cope with *any* medium-term market-dislocation scenario, and I personally prefer to concentrate on that side of things rather than keep churning a portfolio strategy to fight '
the next imaginary war'...
Cheers,
Itsallaguess