Lots of buzz this morning about yesterday's breach of the Dow Jones Index closing below its previous November 20 low. Futures are signalling, at least so far, further declines this morning. The S&P 500 is the more significant index in our work and so far it has not had a monthly close through the November low, neither has the TSX. They may well do it though. Meanwhile gold is this morning poised to re-challenge its 2008 peak. We will deal with the evidence as it presents. The art of risk management is to have a method for limiting the downside, and a plan for responding to various scenarios. Panic is not a method. Neither is stubborn insistence on our own hope or predictions.
As I noted earlier this week, the news is unanimously dark, and sentiment is very bleak. Sentiment is bleak because so few people were mentally or financially prepared for this prolonged downturn. Those that are properly prepared have little to no debt, relatively modest living expenses, no margin or levered investments and savings amassed mostly in cash and high quality bonds. Businesses that are prepared have already taken steps to downsize costs and control spending. People that are not prepared are being driven to desperate measures every day just trying to survive and keep a roof over their head. This is not a happy thing to watch; but one of these days things will stop dropping and the long, slow recovery will commence. We can look forward to that day. In the meantime, practical steps and self-control are keys.
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Danielle, thanks so much for regularly sharing your thoughts. Having your perspective makes it easier to have a logical approach to the markets.
Well SAID!!!!
In all the doom, government bonds have done well. Assuming they are not part of a permanent bond ladder and are more discretionary,do you have a sense of when to sell.? i.e.without giving out too much of a proprietary secret, what would be a reasonable sell rule?
Actually I would say that there is always a place for government bonds as a fixed weight in every portfolio. Maybe it is 20-70% of the allocation depending on the personal circumstances. But managing the duration of the bonds can add great value. In other words, when yields are at multi-decade lows, shorter-term bonds are preferable, and when yields are at multi-year highs longer bonds are attractive. We track various bond indices technically to give us assistance as to when to add or shorten bond duration in our portfolios. Right now we are pretty short with a weighted-duration of less than 4 years. Long bonds can lose 20%+ in rising rate cycles. We want to avoid this kind of price drop as much as possible on the “fixed” income side. Also I would suggest that you never buy bonds at a premium, buying them under par is most likely to be rewarding.