A Simple Framework to Prepare for the Next Bear Market

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A Simple Framework to Prepare for the Next Bear Market

Post by vnatale » Fri Sep 18, 2020 11:54 am

Anything here for those of you who suggest alternatives or modifications to the permanent portfolio or as part of a variable portfolio?


A Simple Framework to Prepare for the Next Bear Market

The aging bull market should push advisors to protect client gains. Alternative strategies can help. Here are some, demystified.

https://www.thinkadvisor.com/2018/10/25 ... ar-market/

We include three types of more popular alternative strategies within this camp. Here’s a brief description of each type, and their correlation to equities (S&P 500) over the last 10 years:

Managed Futures: This strategy invests long and short across multiple asset classes, using quantitative signals to identify when an asset class is poised to rise or fall. The strategy’s ability to track different assets and take advantage of both rising and falling markets has led to a substantially different return profile from most other asset classes, and a correlation of -0.10 with equities.
Market Neutral Funds: These funds include a long portfolio of stocks or other assets expected to outperform and a short portfolio of securities expected to underperform. Near identical long and short exposure makes the returns less related to the overall stock market. As a group, market neutral funds have 0.34 correlation to equities.
Multicurrency Strategies: As the name suggests, this strategy invests in different currencies to capitalize on their relative strength. Traditionally, return streams are different from equity and fixed income markets. Over the last 10 years, the strategy has had a correlation of 0.48 to equities.
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Re: A Simple Framework to Prepare for the Next Bear Market

Post by Cortopassi » Fri Sep 18, 2020 12:02 pm

Boy, if the surge in stocks after the first drop during coronavirus doesn't prove out that there is little correlation of the market with anything happening out there, regardless of earnings, too long of a bull market, too short of a bear market, etc. I don't know what is.

I have trimmed back a couple percentage points on my stock allocation, but that's only because I've been high (35% vs 25%) and less cash (was 10% now 15%)

I'm not sure I'd change anything at this point. I might feel a bit more comfort at 25% cash again, but I'm a bit scared to touch anything right now because it is working.

And I know if I "prepared" for the next bear market, say, reduce stocks to 10-15%, either 1) the bear market wouldn't come or 2) the bear market would come.

But then I'd be mentally stuck on how/when to get back in.
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