Mitigating Major Risk Strategies?

Hi All,

Its roughly 10 years since the GFC. Commentary at the time was saying it was a once in 80 year event but others say the market crashes every 10 years. Who knows really.

I wanted to ask the experienced members who are living of managed funds/ETFs and LICs such as Vanguard and STW etc ....how did you manage the GFC?

• Were you in funds at the time of the GFC?
• Did you get out prior or early to save your capital?
• Did you just hold on and go for the ride and wait years to recover your capital losses buying loading up with more at the bottom?
• Do you have plans in place for the next one?
• Do you only keep a small percentage of your Net wealth in risk products?
• Are you actively out when you perceive heightened risk on the horizon and back in when it looks safe again?
• Are you using stop losses in a huge way?

I'm guessing most see a 20% correction as an opportunity and aren't phased by it but as I build my holdings I'd really like to know how the experienced among us manage the risk of it all going over a cliff again?

Regards,

MJK

 

I would not call myself experienced. Just shared what I did below:

Yes
No
Yes, I bought more on the way down but stopped a long the way as I was using borrowed money (not margin)
Sort of: when the gap between the mortgage rate and yield >=3%
I only invest in shares with reliable long term dividends, not sure how risky products are defined.
I don’t sell out and stay invested.
No stop loss so far.

Hope that helps.

 

I sold everything about 3 months before the crash. Direct shares and managed funds including a geared share fund. That thing returned 85% in the last year that I held it. That was basically the trigger that made me think it was too good to be true so I sold everything. Couldn't have timed it better,thought I was some sort of genius.
But then after preserving that capital so well I didn't want to burn it by jumping in too soon after the crash and I missed the bottom and a large chunk of the recovery. I worked out that I would be in front now had I just stayed invested and even further in front had I continued to invest through the downturn.
I don't have any regrets because I put the money into property that performed well but it did teach me a thing or two about trying to time the market.You can time it perfectly and still end up behind.

Willy

 

Hi Anne11 & Willy,

Thanks for your replies. Both really interesting.
I lost significant $ during GFC due to my own inexperience. Catching falling swords, capital raisings, Stocks that went into trading halt and never came back and fear that kept me out of the recovery.
Tough story but I worked my way back over the 10 years and now once again have the choice to work or not. I'm gun shy now but being invested in index funds rather than picking stocks should avoid issues mentioned above.
I still find myself wanting to sell out when things get turbulent on the markets and was wondering how other people manage the spread of their portfolios. I mean we read a lot on PC about people being invested in the markets and what investments they may like but how much net wealth is in these markets. Is it play money or boots and all?

Currently I sit with 80-90% property assets and 20-10% in stock market related assets.

Cheers MJK

 

Asset allocation obviously plays a big part. Back when I sold everything I was 50% shares which no doubt influenced my risk tolerance.
Even though I avoided the crash I'd never go back to 50% shares after seeing the GFC.
80% property 20% shares is what I'm going to aim for.

Willy

 

My current allocation is at 40% properties. Ideally I want to sell out of residential IPs in 5 year time.

 

Anne11,

60% net wealth exposure to the stock market is high in my book

Selling some property is sort of attractive to me as I would move out of the low yield scenarios and not have the management costs / burden. It would also reduce exposure to tenant litigation if something were to go wrong. (Although I've not ever known anyone to have an issue with this).
Its also getting harder and harder to get those IO loans renewed and the whole PI thing is stealing cash flow.

On the down side one could be forfeiting all the future capital growth and diversification. Possibly increasing risk?

I'd always keep some direct property investments I think. (I've suffered sellers remorse over the years on a few occasions.

Cheers,

MJK

 

I am comfortable with higher % in stocks and other asset classes via Superfund.

IPs are more growth assets and the management cost and time are not what I prefer anymore at this stage in our life.

So when I have spare fund, it will go into stocks not IPs. 40% excludes PPOR.

 

Sounds like way too low share exposure in my view. But then again I’m a retiree and prefer to take a conservative approach by investing in shares (especially for income) as opposed to higher risk property. Additionally as a retiree I also want a truely passive approach to investing given ever diminishing time is our most valuable asset. Investing is property is still like having to work part time. Much better things to do in retirement than deal with the baggage associated with owning property.

 

I hear ya Nodrog. Ive found direct property yeilds fairly low especially after a capital growth run and rates and expenses are relentless. Back in the days when I was negatively geared the expenses didnt seem to matter so much but when you try to extract an income from a portfolio their effect is more noticable. Shares are so clean. The return is the return pure and and simple.
This is why I'm interested in moving a bit more into ETFs but wondered how the seasoned investors managed the risk.

Cheers
MJK

 

I thought I was happy with the return on my IP until I crunched the numbers.

The 3.5% gross return (Inner Sydney) was anemic to start with, but take out land tax, agent fees, maintenance, vacancies, mortgage (even after NG) etc and it gets down to around 2%.

Capital growth over 20 years has been 5.5%.

Now that I’m almost 60 I’d much rather have the simple 6% gross return from share dividends, with slightly less capital growth.

 

I was having a bit of fun also with the shares vs property thing. More than anything it’s the pain in the arse factor more that I dislike about property.

Been busy with other things lately so not on the forum much.

The questions you asked have been covered before but trying to find them would likely be a challenge.

Was in shares long before the GFC, during the GFC and since. I don’t get out of the market no matter what the circumstances but simply continue to add over time. In our case we’re simply after the income stream so each time we buy some more listed funds the income increases also. So given it’s the growing income stream that we focus on we ignore capital ups and downs. Removes the fear that most experience if investing in shares for capital growth.

Note that being able to live off income alone requires a sizable asset base. Fortunately we’re able to do this. Others here can detail alternative approaches where capital is drawn upon for living expenses.

As for buying I favour doing so regularly when cash is available and use leverage conservatively when markets tank.

 

Thanks for the reply. I expected there would be many like "you have explained" that are happy to ride it out as long as distributions/dividends are paid.
I think index funds have a much stronger chance of providing secure distributions than individual stocks do of providing consistent dividends.

I also have a margin loan account with no borrowings , only holdings I use for aquisitions. Margin money is not cheap enough.

For the record I fully understand the LOE principles (drawing capital) I remember the Navra discussions of old. I like the strategy but I do think the way the banks are forcing people to go Principle and Interest rather than staying interest only indefinitely has shot a hole through the strategy to a certain extent.
I will utilise the LOE strategy to some extent until I am of age to access my super but this will be a modest 1-1.5% pa. Ultimately the increased debt has to be dealt with one day. For me it will be taking the 1-1.5% from offset accounts which leaves the actual loans tax deductable.

Its complex getting the mix right. For me anyway.

MJK

 

Yes exactly. One assumption in my previous posts was that the investment was in index funds or LICs as somewhat of an index proxy.

One of the most important things most can can do when investing in shares is to avoid holding individual companies. A company can go bust but entire sharemarkets (index funds) don’t.

 

• Were you in funds at the time of the GFC? Yes

• Did you get out prior or early to save your capital? Yes- got nervous, and now I will only invest in shares via my Industry Superfund. Semi-retired, 90% in property, and still buying. I worked in the health sector at the time, saw many people at retirement age who had to continue to work, it was devastating for people in my workplace, they had to continue to work in occupations that included shift work etc. If you are young enough you have time to ride it out.

 

Hi Cate,

I've seen the same happen to quite a few people.

Heres my idea....

There is a certain number (net wealth value excluding PPOR, not portfolio value) that cannot be risked. This can stay in my Industry Super fund and in Direct Residential Property. (Cash flow +ve after many years).
Amounts over and above the number can be invested into lower risk stock market linked investments. I'm talking Banks & Index funds here.
As savings and Net worth increases over the certain number more can be placed into the Index funds etc...

Currently the net position looks like this....

45% Industry Super
45% residential property
10 % Indexes and Banks.

By the way Cate, how do you go getting finance as a semi retired person? Is it difficult? Last time I approached the banks I had too much $ in offset accounts that was not considered in the equation. Perhaps they thought I was going to run off and spend it all!
Sometimes I think the better you do the less they want to lend. Banks seem to like their standard hocked to the eyeballs, both working with 3 kids, first mortgage variety.

Regards,

MJK

 

Hi @MJK
I’m guessing I think a fair bit different about the market than you do.

I don’t see the GFC as anything but normal.




I am 100% equities apart from my personal use property. No plans to avoid future GFC type events. I see them as just normal part of the market.

I don’t think in lump sums or specific start and finish dates. My excess income has always been invested in the market as soon as possible. My income now is totally generated by the market. If I ever have a shortfall of income, I will liquidate market positions as needed using the markets fabulous liquidity attribute. In other words, things happen in incremental amounts over extended timeframes, so I don’t fear the volatility in ways some other might.

I am progressively moving from active investment to passive investment. I imagine the next downturn will be easier to take as a more passive investor – though the GFC proved huge opportunities as an active investor. Although it was a stressful time, I was very fortunate to have experienced it at an opportune time in my life. I know many other feel differently about the GFC but that may be more to do with the timeframe they view the market through and their stage of life when it occurred.

I hope to live for another 50 years and view my portfolio management as intergenerational. What scares me is not equity market volatility but the relentless undermining of inflation on cash denominated investments.

Of course, a future equity market downturn could be catastrophic - but if the market doesn't stand up - nothing financial will. I prefer to live life now rather than be a doomsday prepper. So I have faith in the capitalist financial and legal structure of our society - If that fails I'm not prepared - but I have had a hell of a good time not worrying about it in the meantime.

 

Truly fascinating! The diversity of perspective.

Really big picture...

I think if I entered the stock market in 2010 I would be thinking it was the most marvelous vehicle around. So yes time frames are hugely important. If I could just have a little of your confidence I may be a better investor.
I guess we are saying long term will iron out the downside but personally I'm not up for another 10 year rebuild. Once is enough.

I'll do what you do with 10% of my funds not 100%

All the best,

MJK


.

 

Yep differing perceptions are truly fascinating.

You see a 10 year rebuild.

I see;

Even if you lump summed everything into the market on the 31/10/2007 you would have been back to square one in 6 years if you account for dividend income.



If you were regularly accumulating over the 5 years prior to 31/10/07 and continued to do so during the GFC, you would have spent less than a year below your cost base and be well, well in front today.

I have a theory that most people count their money too often in the share market and get attached to the high-water mark, they then feel like they did lump sum everything in on the worst possible day and feel the drawdowns intensely. I have never been attached to the mark to market value of my portfolio – I think this has helped me a lot.

But we invest according to our perceptions and the equity market is certainly no place for nervous hands.

If you can ride through property cycles with conviction, it makes sense to concentrate your investments there.


All the best.

 

These are not low risk assets.

Industry Funds are just a structure. It’s what it’s invested in that matters in terms of risk. In fact with some Industry Funds their so called low risk asset allocation is not all that low risk at all. Also if share market exposure makes up a sizeable percentage of the portfolio it WILL be impacted.

As for property should a devastating event occur with the sharemarket the entire economy will be effected and property along with it.

The result of this is referred to as Sequence of Returns Risk (SORR). Many of those that I was aware of whose retirement plans were impacted by the GFC could have avoided this had they, their advisors and / or Super Fund planned for the possibility of such events for near retirees and retirees in the SORR zone.

A typical Industry Fund and / or property alone is not protection against a devastating SORR event.

Getting back to my preferred investment being the sharemarket here’s an example of a very low fee, broadly diversified sharemarket Fund showing their dividend (income) history. I owned this listed fund along with others during the GFC. They’ve been around for decades. I’ve circled where the GFC hit. Income wise I ask you, would you have known there had been any GFC looking at this income chart?



Compare the above income to typical residential property. And unlike a lumpy investment that property is it at least has liquidity if absolutely needed.

But again with proper planning which could be as simple as maintaining a cash buffer it’s unlikely any asset would needed to have been liquidated during the GFC at lower prices.

Most fear of the sharemarket and SORR is due to a lack of knowledge.

As for the GFC in our case by taking advantage of it using available cash and leverage from our investment properties to invest in the sharemarket we were able to retire much earlier than expected. Having been through such events before and knowing what to expect our plan had allowed for the possibility of such things. You never know when they will occur but you best have a plan for when they do especially as one nears retirement or is in the early stages of retirement.

Now retired the only property we own is our own home and the rest is 82% shares and 18% cash / Term Deposits. As we progress further away from early retirement our investment in shares will increase and cash reduce. That is as we progressively move further away from the SORR danger zone.