I mentioned in my previous blog post that if markets went down further, and are down 10%, I would shift some of my bonds into equities. I waited a couple of more days, during which I added another $3,000 into equities, but it seems like we have reached a certain lull in the market. Things are still quite volatile, as can be seen by sometimes very wide swings in the market, but we seemed to have reached a certain “support” point.
Now, I would clarify here first, I am not a chartist, and it is unlikely that I will ever be. I prefer to focus on fundamentals and adopt a longer term mentality then just two weeks or 3 months. But I was bullish at the start of the year, and nothing that has happened since has really changed the fundamentals of the global recovery we see taking place. This means that when markets fall lower, I get tempted to put even more into equities.
Its just as well I forced myself to rebalance my portfolio in December, and even though I was bullish equities, I ended up moving some money into my bond funds because my equity funds had outperformed the bond funds by spades in 2009. Thus, I now have nearly $52,000 in bond funds, and so if I feel that I want to take advantage of a market correction to add back into my equity funds, I can.
However, instead of adding everything, I shifted 20%. Here’s how I see things going. In actuality, most Asian markets are not even down 10% yet, they are only down around 7 to 8%. But overall, I am bullish for the year, so this could be as low as they go before markets start to recover again. However, nothing is ever a sure thing in life. So, I look at worst case scenarios and alternate scenarios.
Firstly, at this stage, I don’t see a double dip recession happening. And even in recession years, a big market crash would typically be 30% down from their peaks. Assuming a worst case scenario (which I don’t believe will happen). I would want to be 100% into equities if markets are down 30% because we would probably be at or near the bottom by then already. Markets are only down 8% at this point, so instead of shifting all of my bond funds into equity funds, I shift 20% instead. This then allows me more leeway to shift more of my bond funds into equities if markets happen to fall further.
The more likely scenario is that markets will soon stabilise, and as the global recovery continues to take hold, start to move north again. In this case, I would probably regret not having shifted everything in bonds into equities, but having a lessor return is something I can live with. You can’t get everything exactly right. I am not trying to predict we are at a bottom for this year. If I knew for sure, I would shift everything into equity funds straight away.
The whole concept of rebalancing, and having some allocation into both equity and bond funds is about managing risk. Hence, my actions over the last two weeks. So, while I would take opportunity to make some shifts like I have done, I recognize that if markets do recover and move back into a bullish mode, then it would be wiser to shift back to my original allocation at the start of the year then. Just in case people are curious, I shifted $3,000 from the Fidelity High Yield Bond Fund into Aberdeen Pacific Equity, and I shifted $8,000 from INF EF Emerging Market Bond Fund into Aberdeen Asian Smaller Companies fund
Certainly though, I will be watching markets closely at this point. Do I think we are at the bottom for this year? I wouldn’t know, since short term sentiment can change very quickly. However, I don’t believe the fundamentals have changed in any major way over the last two weeks, so, the correction has made me more aggressive in my portfolio positioning.
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