On Tuesday 6 February 2018, the ASX fell 3.4%. Tens of billions of value was wiped from stock markets around the world. We get a lot of questions about how we handle a day like that. What exactly do we do – and when? So, here’s the diary entry from the Affluence team for 6 February 2018 – the day the ASX had its biggest fall since 2011.
Preparation started a long time ago
We awoke to the news that all had not gone well in the US overnight. US markets were down around 3% at lunchtime (US time), nearly 6% mid-afternoon and around 4% at the close. Both Greg and I arrived in the office reasonably early to review the situation and prepare for the day.
While we started the day reviewing our Affluence Investment Fund portfolio. The reality is that we have a very good spread of managers, many of whom we expect to do a lot better than average on a day like today. Over the last few months, we’ve slowly repositioned the portfolio as stock markets have climbed higher. We reduced our overseas allocation to around 10%, increased cash a little and bought a few put options. And while on a day like today, our small-cap and resources investments might feel some pain, we have property, long-short and market neutral funds to limit the damage.
Having reviewed our AIF portfolio, we moved to the part we would focus on through the day, our LIC investments. Here again, we’ve gradually been increasing our cash and reducing our exposure to offshore markets over the past few months, as markets have trended higher.
Before the market opened, we updated our model which uses what we know about the underlying LIC investments to predict NTA’s. This model would be updated several times during the day as markets, and individual stocks moved.
Market open
Just before the market opened, we put in a bunch of small sell orders. Sometimes LIC ‘s can be slow to react to market moves. We wanted to add a little more to our cash at around yesterday’s closing values if we could, in preparation for buying back at lower values later in the day. We had very little luck though, managing to sell only a very small amount of a few holdings as the market opened. Luckily, we had already increased our cash holdings to 25% over the past few weeks, and this left us in good stead for today.
Midday
Around lunchtime, both Greg and I went out to clear our heads and think. The afternoon was uneventful for our portfolio. However, we saw some big falls on overseas markets, with the US down a further 4% at one point on yesterday’s close, and most European markets down 5-7%. The ASX gradually fell in the afternoon – at its worst down almost 3.5%. We considered selling some of our put options, which had increased in value quite a bit since last week. But in the end, our feeling was that while tomorrow might well bring a bounce, two big down days is a sign that there’s almost certainly more volatility, and likely more downside to come before this is over. So, we held them.
Closing time
Right near the end of trading, we purchased some call options. For a small premium, if markets rise back to where they were just last week, we’ll make some good money. And if they don’t, we haven’t lost much. At closing time, we still held about 25% cash in our LIC portfolio. If we see some value emerge here in the next month, we’ll be ready. Our LIC portfolio was certainly down for the day. More than we’d like, but much less than the market. Our Affluence Investment Fund portfolio, however, is likely to have been very resilient.
What did we learn?
So what are the lessons from a day like this?
Be ready in advance
It’s too late to figure it out on the day. Your portfolio should be prepared for all markets. Your research should be done. Your contingency plans in place. You should be ready to make decisions quickly if need be. But…
Don’t panic
Take slow, deliberate, rational steps. Most days, we make very few changes to our portfolios. On Tuesday 6th February we had slightly above average activity – but only because of a few extra small opportunities and our ability to react quickly.
Maintain a long-term focus
Even immediately after the correction, markets were still higher than they were in December last year, just a few weeks earlier. Ignore the headlines and make sure you keep your perspective. Investing is a long-term game.
Don’t be complacent
Volatility rarely goes away quickly. Particularly where it’s not really linked to a definable event. This type of market turn usually sees a change in attitude, which then persists for a while (weeks or months). In this case, it’s hard to see the bullish sentiment from December and January coming back quickly – but you never know!
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