Permanent Portfolio is a self-directed long-term passive investment strategy, introduced in 1981 by Harry Browne and Terry Coxon and simplified into 4 asset class in 1987. It aims to provide consistent market returns and protections in different economic cycles of growth, inflation, recession and deflation. The strategy does not rely on market timing, and requires yearly management and minimal monitoring. This site is to provides educational information for learning about my research and implementation of Singapore version of Permanent Portfolio. Readers can also use the Permanent Portfolio knowledge to diversify their stock heavy portfolio into long term government bonds and gold for better portfolio protections in recession, deflation and inflation. Disclaimer: Use of information on this site represents acceptance of the disclaimer at bottom of this page and Disclaimer page.

Wednesday, 24 October 2012

STI Review 2012 Oct and Guide 3 to Investing Plan A and Plan B

Here is the third action plan continued from previous two posts.

3. Plan B: What to do with existing stock portfolio now if market is really 'not cheap'?

This section is more for newer investors who may not have made suitable contingency plan B for market downturns. So what has been your plan B when stock market is not going for a downturn? Basically there are 5 possible kinds of plan B.

First kind of plan B is to hold on to stocks and hoping the market goes up, up, up, and never come down, while having no clear idea when to sell to lock in profit - this is just pure gambling, not investing. In investing there is no hoping. Investing follows a clear plan regarding when to enter or exit positions and rebalance assets in different possible market conditions. So better start adopting one of the next few plans now.

Second kind of plan B is to sell off some stock to lock in capital gains profit when warning signs of market turning are apparent, then to hold some cash and ride the market down with rest of stock assets, and wait till market bottomed adn turn upwards to buy back cheap stock with cash. This way, in case the market downturn is a very short one, there will still be stocks to take advantage of the next leg up in stock prices. In my opinion, it is more correct to say a pure equity portfolio has 2 kinds of assets – stocks and cash savings. It may be 90% stock and 10% cash savings now. If a major market downturn is expected, an investor may wish to sell some stocks and leave the defensive stocks, so that stocks become 50%, cash savings become 50%. The 50% cash will create buffer to reduce overall portfolio loss. The 50% stock is in case the stock market keeps on going up, which is why one may need to always be invested in market. Seeing a stock portfolio as 2 assets and in terms of percentages can make it easier and more mechanical to do such profit taking and rebalancing.

Third kind of plan B is to sell off part of stock portfolio and buy some government bonds to buffer and reduce potential stock losses, before downturns happen. For a pure equity portfolio, this will be selling some equity to take some profit and diversifying into bond to reduce the portfolio risk. If one already has a bond and stock portfolio, this is just normal rebalancing and profit taking. For a current pure equity portfolio, switching partly into bonds also allows profiting from the appreciating bond prices so that at suspected market bottom, the appreciated bond price can be sold to buy more cheap stocks. Another advantage is that since portfolio losses are smaller, when cheap stocks are bought and the market recovers, the losses are recovered more quickly and portfolio can also get bigger gains.

Fourth kind of plan B is to sell off entire portfolio at suspected market top and call it a good run. This is market timing and this game plan is not suitable for most people, since it takes unique skill to market time correctly and consistently and one has to be sure one has the correct psychology to really be able to let go and sell everything when the telltale warning signs appear in market. The bad part is if the investor mind is not strong enough and has no clear exit strategy, it then became a gamble. So if the market downturns suddenly, and the investor keep waiting for price to retrace back up before selling, and when price retrace back up a little, wait some more for price to rise only to find that the price keep dropping and dropping already, until investor panic and sell at small profit, to break even and forfeit profits, or even incur losses.

The fifth and last but not least plan B is to buy value stocks or dividend stocks and do not sell them ever, unless under specific circumstances. This is the Warren Buffet plan B and we all know how successful he is at value stock picking. and growing portfolio If one has the Midas touch and is successful at stock picking of value companies and business, then this is the way. Otherwise for typical investors who do not have this magic touch of picking correct value stocks, this buy and forever hold approach is not suitable.

An investor has to choose a suitable Plan B plan for market downturns, else risk losing all the 'paper profits' or worse, incur losses. Capital protection is as important as capital appreciation and income in investments. There is no point to grow a 100k portfolio by 100% to 200k, only to have a major market downturn decrease portfolio by 50% and make the 200k back to square one 100k again, or worse. Capital loss can be made back, but the time and years that were used to get the 100% gain will be wasted and the time cannot be recovered. Having Plan B is especially important for a pure equity investor as such pure equity portfolio is very volatile, and equities can lose a lot quickly in times of stock market distress. Wiht a suitable plan B, the investor can keep calm instead of panicking and doing disastrous things to portfolio. For a bond and stock passive portfolio investor, Plan B is already built into portfolio through mechanical rebalancing and having the negative correlation between stocks and bonds, so passive portfolio investor just ride the ups and down more calmly.

So in summary, Plan A is for new investor to decide when and how to start a portfolio in order to start investing on a firm foundation. Plan B is for investor to decide how to preserve capital and retain profits. There is another Plan C which is to decide how to drawdown the money from a portfolio at a sustainable rate during retirement so the drawdown can last for a lifetime, and so Plan C is another topic to be discussed separately.

My view on STI is not a market prediction to sell now, it is just the warning signs as I see it, and your investment decision should not be based on my input alone. Rather, I am using this example to point out possible good and bad entry strategies for potential new stock investors so that they can avoid costly entry mistakes, and to get new and existing investors thinking about having a strategic game plan B to preserve investment capital during future market downturns. If my views on STI prove true in next few months, then hopefully more investors will be prepared to weather downturns well. If my views are absolutely wrong in next few months and STI rose like nobody’s business, then new investor can still take heed to formulate a strategic plan B so that new profits can be kept in future downturns. Good luck and good investing to all.

Disclaimer: I am not a financial adviser and I am not working in finance related industry. I am an investor for my own assets and speaking from my personal viewpoints. Readers should do their own due diligence and learn about any investing strategy and suggestions well before using them. I will take no responsibility for your investment results. I am currently vested in 4 assets, namely SPDR STI ETF (ES3), 30-year Singapore Government Bond (PH1S), Gold ETF (O87), and my own cash savings.

Go to:
Part 1 of Article -
Guide 1 to Investing Plan A and Plan B
Part 2 of Article - Guide 2 to Investing Plan A and Plan B

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