What to do as the Bear Approaches

I have written in the past about how I approached the COVID market decline. My plan was to increase my equity position gradually as the market declined, first at correction (down 10%), then bear (down 20%), then every 5% decline thereafter. This way I didn’t have to determine when the market reached the bottom, just be methodical in my approach. I then sold shares as the market recovered and made a decent profit from my efforts.

A while ago I followed Morningstar’s research that projected that decreasing equity exposure to 20-40% would generate similar returns compared to an equity heavy portfolio. This was due to high equity valuations. Because I believe only small changes in my allocation is prudent I only decreased my equity position by 5%.

Now I have been considering returning gradually to my original target allocation.

David Sekera of Morningstar has an example on how to approach such a change in one’s portfolio allocation:

A lot of investors have a 60/40 portfolio, 60% equity, 40% fixed income. Let’s just say that you’re willing to go to a 70/30 portfolio. So to me, you could reallocate 3% out of fixed income and into equity today, set your target, i.e. another 5% down. If the market drops at 5%, that’s when you reallocate that next 3% out of fixed income into equity, set your next target. Maybe that’s down another 5%, and that’s when you make that full overweight position. So taking a look at where futures are now, when you get to that full overweight position, that would mean that the market had fallen about a total of 25% year to date and a total of 35% from its Feb. 19 highs.

I plan on increasing my equity position by 3% when the market reaches bear level, then another 1% for any future decline. I don’t plan on making a killing, but hopefully obtaining a little increased return due to the equities being on sale.

Are others considering this play book?

Now as for some of my bond funds, I’m pretty irritated they lost more than 1% yesterday. I know they offer ballast to equities, but I’m hoping it doesn’t portend 2022 again.

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