The article addresses the question of whether to sell or buy shares during a stock market downturn. Experts suggest aligning portfolio risk to investor preferences, which might involve selling some safer assets (like bonds) to buy more equities to restore the desired risk level. This strategy aims to be well-positioned for market recovery.
While equities are emphasized, the importance of diversification through fixed-income assets, especially high-quality bonds, is highlighted. These bonds offer potentially good returns with low risk, particularly attractive when riskier assets like shares underperform. Government bonds are mentioned as having very low default risk compared to corporate bonds.
The article notes that cautious managed funds (with maximum 60% in shares) have experienced less significant losses than global equity funds during the current downturn. While long-term equity investment likely yields higher returns, it comes with greater volatility.
For example, if your portfolio is set up to be 80pc equity and 20pc bonds but the market fall means it is now 70pc equity and 30pc bonds, that is no longer your preferred risk. As a result you may not be as well positioned to benefit when the market bounces back.
So despite it feeling counter-intuitive, Mr Norton suggested it is worth looking at selling safe income assets, such as bonds, and buying more equities to get back to your desired weighting.
“We are not saying we are at the market bottom, we are aligning the level of risk of the portfolio to where the investor wants to be so that when the market does bottom out they have the market allocation they want to benefit from the bounce,” Mr Norton added.
However, that does not mean you should disregard diversification. Mr Norton said that fixed income assets, primarily bonds, are the most important asset class often overlooked by investors.
He suggests that high quality bonds are currently offering good returns for a low level of risk.
Ed Monk, of broker Fidelity International agrees, despite noting that the risk of higher inflation traditionally makes fixed income assets less attractive as it erodes the value of the amount they pay.
However, Mr Monk said: “High quality government bonds begin to look very attractive when returns from riskier assets, like shares, are in question. Unlike corporate bonds issued by companies, that face a raised risk of default during a recession, government bonds carry very low default-risk.”
Mr Khalaf added: “So far this year the typical global equity fund has seen its value fall by 9.4pc. For a typical cautious managed fund, which holds a maximum 60pc in shares, the fall has been just 1.4pc. Over the long term, full exposure to the stock market will probably still deliver higher returns, but with much more volatility along the way.”
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