Sunday 15 February 2015

The Bull-Bear Tug of War

I really liked the series of posts on asset allocation started by Derek and followed on by a few other bloggers. Unfortunately, I was busy with the privatisation theme then and could not participate. So, here is my post on the issue. To make up for the late posting, I added a few notes for readers' info.

I have been tracking my asset allocation since 2001 and the figure below shows the asset allocation at semi-annual intervals since then.

Semi-Annual Asset Allocation
Each column shows the asset allocation at the stated point in time. The assets are arranged such that the more equity-like an asset is, the lower it is placed, while the more cash-like an asset is, the higher it is placed. Thus, you find that equities are placed at the bottom, followed by REITs while at the other end, cash is placed at the top, followed by preference shares. In the middle are the hybrid assets, such as unit trusts which have a 70% equity / 30% bond split. The "Others" asset refers to a commodity fund which is neither equity nor cash. Thus, you can see that each column resembles a tug of war between members of the Bull Team (i.e. equities & REITs) and members of the Bear Team (i.e. cash & preference shares). The hybrid & other assets resemble the ribbon commonly found on the rope in a tug of war. So, as at end Dec 2014, the Bull Team and the Bear Team are quite evenly matched. Using a commonly used term, the size of my war chest is around 43% currently.

One advantage of the historical asset allocation chart is that it allows me to review how the asset allocations have changed over time. Currently, the Bull Team (specifically equities) is gaining ground on the Bear Team, which is a reflection of the Changes to My Investment Strategies in 2014. For a preview of how the tug of war will turn out in the next 12 months, you can refer to My Investment Trends for 2015. Overall, the historical changes in asset allocation follow a contrarian approach as described in Have a Plan.

The second and more important advantage of the historical asset allocation chart is that it allows me to understand clearly how I react during bull and bear markets. Referring back to the chart, the allocation to equities and REITs ranges from a low of 22% in Jun 2007 to a high of 77% in Dec 2002. This means that I will never be fully out of the stock market during bull markets nor totally in during bear markets. The range is probably between 20% and 80%. Conversely, the size of my war chest ranges from a low of 23% in Dec 2002 to a high of 78% in Jun 2007. There are 2 important points to note from this. Firstly, I will never fully deploy my war chest, even in the depth of a severe bear market such as the Global Financial Crisis (GFC). For me, the psychological benefit of having some cash left in the bank far outweighs the monetary benefit of buying stocks at bargain basement prices. Secondly, since not all of the war chest will be fully deployed, the current size of the war chest must be viewed against the historical range. On surface, the current size of war chest at 43% might look quite large, but in reality, it is closer to the low of 23% than the high of 78% achieved historically.

There is however a major disadvantage in tracking the historical asset allocation. Since I adopt a contrarian approach, invariably, I would also see how well I had timed the market during bull and bear markets whenever I look at the chart. The most obvious error would be during the GFC in Dec 2008, when I only had 62% in equities and REITs. I always have to remind myself that a decision was made then to stage a final stand if the Straits Times Index were to fall to 1,200. Sometimes, during times of relative peace, it is easy to forget the severity of the market collapse and all the issues that cropped up during that difficult period. A glimpse of the events then could be found in Behind Every Successful Bear Market Recovery is A Cash-Like Instrument. Anyway, a post-event analysis suggests that entering the market before events become clearer might not be the wisest decision. See Be Cautious While Being Greedy for more info.

So, how does your Tug-of-War between the Bull Team and Bear Team shape up?

See related blog posts:


  1. Hi Boring investor,

    Another insightful thought that exposed vulnerabilties of my approach this far.

    Maybe I should think about increasing cash ...

    1. Btw, you do rebalancing on portfolio based on ...?

      What I mean is you review it every 6 months, or once a asset hit a certain percentage would automatically trigger a rebalancing.

      Or do you have other criteria

    2. Hi Sillyinvestor,

      I set a target allocation for cash (and cash equivalents) for each STI level, i.e. when STI is 3,300 points, cash allocation should be xx%; when STI is 3,400 points, cash allocation should yy%, etc. You can refer to Have A Plan for more info. However, between cash and preference shares, there is no target differentiation. Likewise for between shares and REITs.

  2. Hi Boring Investor,

    Thanks for sharing and keeping the ball going. I'm going to make this an annual blog post.

    Just to be clear, does your cash allocation consist of money for daily expenses, bills, emergency etc? I notice that you have a huge allocation in Preference shares and in 2013, you started buying Unit Trusts. I presume you are moving towards income generating assets?

    1. Hi Derek,

      I should be the one thanking you for starting this thread.

      Yes, the cash includes money for daily expenses and emergency fund. Yes, I'm moving towards income generating assets.

  3. Hi Chin Wai

    Good post here and great links across and a timely reminder to all of us.

    With your experience in investing I think you are one of the few who had undergone the trough of bears and the peak of bulls. Good advise and thank you.

    1. Hi B,

      Thanks. I've regularly visited your blog and I like your posts too!

  4. Hello Lee Chin Wai,

    I have the pleasure of meeting your schoolmate from "Growing your tree of prosperity" last week in person. He even sang for us!

    Chris highly recommended your blog.

    I smiled back that I'm already your reader ;)

    You know what? You don't engage in hyperbole (free I must give Chris a kick one of these days for insulting Confucius), and you definitely don't clown around like me.

    Your posts have depth.

    I face-palm whenever I hear newbies tell me they are well diversified because they have 100 stocks and 100% vested!?


    1. Hi SMOL,

      Thanks for your support. Chris is as fun-loving as you are. I guess both of you hit off very well!

  5. Hi CW,

    Great post..esp loved your charts on the different categories of your asset allocation in a time series. Literally adds a new dimension to the whole portfolio allocation theme. Like you, I probably will never allocate 100%'ll make me very anxious about the market. Too anxious perhaps.

    1. Hi La Papillion,

      Thanks. Like you mentioned in your post on the same theme, with so many of us holding 50% in warchest, the bear market isn't likely to come soon!