DIY Investor Magazine
/
March 2017
23
‘YOUR INVESTMENTS SHOULD GIVE YOU NO SLEEPLESS
NIGHTS – DIY INVESTING IS ABOUT ACCUMULATING AND
MANAGING WEALTH OVER A LONG TIME HORIZON’
‘BEWARE ALLOWING THE SIREN CALL OF A PROTRACTED
BULL MARKET TO DROWN OUT YOUR NATURAL CAUTION’
Your equity allocation is then adjusted higher or lower
according to your reaction to the bear market scenario
described above:
Very High Risk – increase equity allocation by 20%
High Risk – increase equity allocation by 10%
Moderate – age = bonds%; balance = equities
Low Risk – reduce equity allocation by 10%
Very Low Risk – reduce equity allocation by 20%
A high risk 30-year-old would be 80% in equities and
20% in bonds; a low-risk 60-year-old would go for 70%
bonds and 30% equities.
Changes in your personal circumstances, attitude or
confidence may allow a little tinkering with the equity/
bond mix over time, but beware allowing the siren call
of a protracted bull market to drown out your natural
caution.
A cautious approach may enable you to grow in
confidence, but that first loss, when it inevitably comes,
will still feel pretty bad; be prepared and able to ride
it out as a paper loss until things
improve – the UK
market saw 33% of its value wiped out in 2008;
eight years on the FTSE 100 is at record levels.
Passive investments champion Monevator suggests
trying the following:
•
Write down the equity value of your portfolio.
•
Halve it.
•
How would you feel if that’s the amount you had
in six month’s time?
•
How would you feel if it took 10 years before
your equity portion recovered its original value?
Would you hate yourself? Would you feel
stupid? Sick?
•
If so, repeat again only this time you lost 25%.
Then 20% and 10%.
•
Can you cope if your portfolio doesn’t recover
for 10 years?
•
Dampen your portfolio with bonds or cash until
you reach a position you can live with.
Based upon your response to the above exercise,
academic Larry Swedroe suggests the following
asset allocation model based upon the addition
of government bonds to mitigate against an
unwillingness to accept losses.
Max loss you’ll tolerate Max equity allocation
5%
20%
10%
30%
15%
40%
20%
50%
25%
60%
30%
70%
35%
80%
40%
90%
50%
100%
