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:

• Have a Plan
• Behind Every Successful Bear Market Recovery is A Cash-Like Instrument
• Be Cautious While Being Greedy