How to approach a bumpier decade for equity investors
By: Tim Bennett
08.08.2019
Will the next ten years be as bullish as the last ten for stock market investors? Tim Bennett explains why they may not be and discusses the right approach.

How to approach a bumpier decade for equity investors

The last ten years have been pretty kind to stock market investors. However, the next ten may be less so. Here I look at why and what investors should do about it.

Background

Common sense tells us that good things must come to some sort of end, eventually. That is true in the stock market as elsewhere. And although predicting the timing and extent of any change in the market is a fool’s game, nonetheless the odds are stacked against a repeat of what we have seen recently.

Simply the best

So, how good was the last decade? Although sometimes described as “the most hated bull market in history”, based, as it has been to at least some extent, on central bank easing, even ardent bears can’t argue with the robustness of it in statistical terms.
If we focus on that third point about drawdowns, you can see that investors have rarely had it so good in terms of not losing money.

Observations

Knowing this allows investors to be a little sanguine about what the next ten years may hold. Pure probability alone would indicate that, whilst we may not see a huge correction, we are in for a less generous patch.
The questions then becomes, what should they do about it?

What to do

The answer could perhaps be summed up as nothing too drastic. No-one should be selling up in the hope of timing the next market cycle. However, a review of existing positions is sensible in anticipation of a short-term dip.
Whilst the past is no guarantee of the future, nonetheless a look back at some fairly recent big dips can be instructive.
Although market sell offs can be pretty scary at the time, the reality is they have not tended to last long in the context of a lifetime.

A suggested approach

What this suggests is that the best approach isn’t radically different in a bull or bear phase. You will need to review your rainy-day funding, position yourself to fund foreseeable calls on capital and then confidently leave the bulk of your lifetimes savings in equities. However, in the context of a potentially rockier ride, focusing carefully on the second of these three pots makes sense.

Managing foreseeable calls

As a reminder, let’s consider someone who is planning to meet the cost of long-term care. Both the timing and amount can be estimated, both for today and in future years, albeit you will need to make a few assumptions along the way (such as the rate of fee inflation).
From here an amount can be estimated and compared to the proportion of your investible assets that are liquid (in cash or short-term bonds).
Once you have the short to medium term covered with sufficient cash and/or short-term bonds, then it is a case of monitoring your overall asset position and reallocating capital as the need for it arises. Needless to say, this requires a it of judgement.

To find out more

If you would like to discuss your portfolio positioning and/or how to manage foreseeable calls on capital, please contact an Investment Manager or email me at [email protected].