Mama whispered softly, “Time will ease your pain
Life’s about changing, nothing ever stays the same”…
Patty Loveless

Having been through many share market crashes since 1987 I can say that not only are they a time of great turmoil but strangely, these occasions also seem to create much innovation. Well at least within the fund’s management industry that is!  Often, as a result of major crashes, consumers become ‘gun shy’ about any type of market-linked investment; emphatically staying away in droves from anything remotely associated with share markets. And who could blame them for this reticence as the severe market falls literally rob years of returns from someone’s retirement dreams?

But that doesn’t sit at all well within the funds’ management industry, oh no! They need a constant flow of new money to satisfy their voracious appetite for fee income and a little thing like unstable markets will never get in the way. Their answer has always been to wheel out a stream of ‘new and improved products’ all designed to provide the feeling of safety and security for new clients.

Now, because bear markets are brutal affairs at the best of times, there has been much study on how they play out. And it seems they follow pretty much the same pattern every time. In fact, so well defined are they, that all traverse a number of stages before they burn out. Now of interest here, is the final stage termed ‘capitulation selling’. This end-stage encompasses the swansong of all those hardy souls who have held on right through the depth of the bear market but are now finally beaten and throw in the towel.

Totally convinced that investing in shares will never return back to its former glory, what usually begins as a trickle quickly turns into an avalanche of selling, as every man and his dog “get the hell out”.  But unfortunately, this final flurry to the downside can only really be seen retrospectively so its occurrence is only ever ‘predicted’ after it happens; however, no bear market is deemed complete without it.  

But as a result of this final ‘bloodbath’, share markets are now perceived by the public as far too risky and akin to gambling! In fact, research suggests that it takes about seven years for the average investor to regain their confidence to re-enter markets. And of course, this is far too long a wait for the average fund manager whose short term outlook requires new funds regularly no matter what.

So fund managers begin the process of developing and delivering ‘new and improved’ investment products focussing on protecting capital to secure initial investments while still providing ‘stellar returns’, or say they say.

These products come under the general heading of protected or structured products. And these ‘bad boy’s’ often flood the markets after any major market upheavals. The premise being that ‘guaranteeing’ the initial outlay will assuage a new investor’s thoughts of losses enough to lead them merrily back into the world of investment. But more often than not, these ‘capital guarantees’ come with more strings attached than Jimmy Page’s double-necked Gibson!

And each string always comes at a cost. Whether that be direct, as a result of lowered returns, or via a complex web of fee’s, revealed only in the small print of the offer document. Whatever they may be it does allow a product’s advertising to feature a crucial word – ‘guaranteed! (just like I featured in the title of this post!) Because it is this word that rings a bell with investors. And certainly much more appealing than declaring lot’s of ‘hidden fees’ with a ‘guaranteed lack of returns’!

Structured products are merely manufactured investment vehicles that combine together the many variants of share market investment such as options and derivatives. All done with the premise that not only will this magical combination provide enhanced returns but importantly, it will also render the investment ‘safe’.  

So without discussing individual products in detail, generally speaking, the key investment strategy inherent in most protected products is that of partial investment. Often an investor’s funds are split between a cash investment and derivatives based strategy. The use of derivatives allows for a multiplying effect of the partially allocated investment funds, whilst leaving the cash portion to be corralled from risk and left to safely compound over the life of the product, usually at least 10 years.

The important marketing message is therefore stressed as the safety of the initial investment over its term. That is, you’re guaranteed to get your original money back. By the way, often these products are paired with a fixed-term investment loan, giving the investor not only a guaranteed return of their initial investment but a tax deduction along the way.

Very tempting to the uninitiated investor, as what could possibly go wrong and most certainly tempting to any adviser who wishes to set up a nice, long term stream of fee income! A win/win result – not!

Again, without going into specifics, my experience of any of these types of investments is that they just don’t work, simple. I can honestly say that none of these magical products has ever performed as they’re supposed too – and I’ve seen lots. The fees are usually so invasive they pare back returns and the locked investment duration means any events that could trigger the ‘protective features’ will relegate you capital to reside in cash for however many years the product has left to run.

So you may get your initial capital back, but sans any inflation adjustment and possibly in many years time. And to add injury to insult, your time left locked into the investment continues to attract all the ongoing fees and loan interest where applicable.  How’s that for a great guarantee!

My advice will always be to steer well and truly clear of any of these protected products. As comforting as they may seem, they have come into existence only to lure you back into the investment world. For, unfortunately, these types of products are well and truly made just for the benefit of the product provider.  Another great example of what I refer to as the investment equivalent of bottled water! Was it really needed, I don’t think so?

So is there anything an investor can do to reduce the effects of severe market corrections? Well, apart from moving their total portfolio to cash, reducing the short term effects are near on impossible. As the father of Modern Portfolio Theory, Harry Markowitz proffered, there are two types of risk; diversifiable and non-diversifiable. And most certainly any major global macro event that shakes the foundations of investment markets is certainly classified as a non-diversifiable risk. As such, no matter how well your portfolio is spread, you are still going to feel the effects! 

However, there are certain strategies that when viewed over the fullness of time will assist investors to at least make the best of any crisis and proactively manage their portfolios. As they say, “never waste a good crisis”. But remember, there are absolutely no magic bullets here; if you’ve created a “hotch-potch” of an investment portfolio, based on hearsay and well-meaning tips from your friends, then the very best of luck to you, because you’re on your own!

The following strategies are best used as part of an overall, well thought out investment plan, so if you don’t have one, then it’s time you revisit and revise this aspect of your investing.

Dollar-cost averaging

The most fruitful strategy for a long term investor during times of crisis is usually to add to their portfolios rather than exit the lot. As mentioned earlier in this post, bear market action has been thoroughly studied and documented and has always shown the same outcome each and every time we experience them. And that is, all bear markets are followed by boom markets. Of course, the timing of that boom is never predictable.

It could be months, years, or in some extreme cases, decades. But boom it most certainly will! This is a significant fact to remember. So even in the deepest, depths of despair it’s vital that you remain convinced of the eventual recovery and don’t capitulate like the majority eventually do. Long term experienced investors always stay the course because it’s been proven time and time again to be the absolute correct action.

And the best way to add to a portfolio is through what is termed dollar-cost averaging. This is the strategy of committing funds to the market on a regular basis no matter what the price action is doing. So you are buying a particular share one month at prevailing prices and the next month you commit the same amount but at whatever the prevailing prices are at that time. They may be more expensive or cheaper; it doesn’t matter, as long as you are adding regularly.

Where the magic of this strategy is revealed is when you total up 12 months of purchases and then divide this figure by the total number of shares you bought. The result will be your average entry price. This can then be compared to the current price of the share. Because you have been regularly purchasing, you’ve actually bought shares at both high and low prices and everywhere in-between. And it’s this inherent market volatility that will have provided you with a good average buy-in price.

I recall reading many years ago that during the great depression, dollar-cost averaging was the most fruitful strategy for investors to adopt, so read up on it as there’s plenty of information about it online. Here’s somewhere to start, an earlier post of mine – and try this one as well from Morningstar.

Re-balancing your portfolio

For those of you that have assessed your risk profiles and built your portfolio based on asset allocations that reflect this profile, times like these scream out for a rebalance. Because market volatility is currently at its highest even the merest suggestion of good or bad news sends seismic waves into buyers and sellers. And these rapid valuation shifts will skew even the most conservative portfolio.

As a result, moving your portfolio back to your initial risk weightings probably needs to be done far more regularly.  Of course, this is your decision on how often you do this, but don’t go overboard, too much rebalancing i.e. monthly, is probably as ineffective as waiting for too long to do it!

And yes, just like Dollar Cost Averaging, rebalancing your portfolio will require you to commit more funds into a pretty volatile market. Again, by staying confident of recovery and that’s what the research tells us, you are you actually finessing your investments to take full advantage of the current crisis. (As we have already said “don’t waste a good crisis!”)

So, quite simply, rebalancing requires selling down assets that are currently overweight and allocating the excess funds into assets below your normal preferred allocations. And, most likely right now, the asset that will be well below your portfolio settings is going to be equities. So it’s time to pull out the cash and buy into a depressed market.

Easier said than done – absolutely! But remember, this re-weighting exercise is forcing you to ‘buy-in’ at far greatly reduced prices than what was available two months ago. And that’s got to be good – remember the next boom is coming, okay!

Now, rebalancing has always proved its worth through all market conditions. Basically it resets your level of portfolio risk back to your comfort levels. But it also forces your hand to proactively manage your portfolio and in times of boom, you are actually taking your profit, which is a good thing.

And in times of doom, like at present, it forces you to take action and buy into depressed markets when you’re not so eager to do this! Buying during crashing share markets is something you probably always talked about doing, but when push comes to shove, most of us usually lack the courage to enact it!

Therefore, simply embarking on regular rebalancing allows you to take full advantage of the prevailing market situation, whatever that may be at the time.

The Bucket strategy

Now, this strategy is specifically designed for those drawing down their portfolios and living off the proceeds. That is, in lieu of just taking any dividends generated, assets are periodically sold to fund lifestyle needs.

The bucket strategy was initially formulated for retirement income stream products where a mix of growth and cash assets, consistent with risk profiles, were utilised. Developed in order to protect overall balances when selling down growth assets during a down market, it quite simply divides a portfolio’s assets into three major groups (buckets) – short, medium and long term.

Annual income needs are then drawn from the short term bucket, leaving the other two untouched. Bucket one, being predominantly cash, doesn’t fluctuate during market volatility as the other two do, therefore withdrawing from it at the ‘wrong time’ has no effect. i.e. you’re not forced into selling assets that are depressed because of market conditions.

The important component of the strategy is during set up.  This is when the portfolio’s assets are divided between the three buckets. Within the advice industry, it is normal to assign three years of income needs to bucket one. Therefore it is important to calculate with some accuracy yearly expenditure.

This figure is then multiplied by 3 and the amount credited into the first bucket. Thus, monthly drawdowns of equal amounts are achieved without disturbing other assets in the portfolio and giving sufficient regular income to support you for three years.

This then allows the other two buckets time to grow, but just as importantly to regrow should a serious market downturn occur. Bear markets on average last around 2 years, so having a three-year income buffer gives sufficient time for the longer-term assets to recover.

Towards the end of the three years, it becomes time to rebalance and draw funds from the other buckets to top up the cash bucket. But remember three years have elapsed which has given reasonable time for growth to occur across the portfolio.

This strategy was developed to create an efficient income stream from a portfolio that recognised the need for growth assets in long term investing, but also the downside volatility of those assets during times of market duress. So if you want to create an income stream from your portfolio and the dividends alone aren’t sufficient then the bucket strategy is the way to go.


So there you have it, three strategies that work during all market conditions. Not a magical method of making money, but rather well thought out actions that take advantage of the prevailing circumstances or at least counter the effects of the prevailing circumstances.

Don’t get fooled by all the innovative new products that are about to flood the market shortly through your ‘friendly’ fund manager. As far as I’m concerned they just don’t work the way they are sold in their advertising blurbs! – So stick to the strategies that have been tried and proven to work time and time again.

And never forget, when investing money, ‘caveat emptor’ must be your guiding light, so make certain to do your own research.

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He dares wins, so get out there and do some investing.
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