Certain Uncertainty - Control what you can Control and Moving into Cash - Part 6 of 6

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Conclusion
I have found it very useful creating this Blog Series because it puts down in Black & White what the true likely Costs of ‘Moving into Cash’ are and then the exercise of relating this to Portfolio Size has been highly revealing and has essentially indicated that unless your Portfolio is over at least £100k then it really isn’t worth the bother - and arguably when you consider the hassle and timing issues of doing it, the whole thing might not make sense unless your Portfolio is worth over £300K or so - it is obviously for Readers to run the Numbers and see how it would work out for their own Portfolios in the same way that I have done. And of course it is very much a personal preference thing and related to how comfortable you feel about perceived Risk at any point in time.
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After producing this Blog the Factors that determine whether or not it is worth ‘Moving into Cash’ really boil down to:

• Size of your Portfolio.
• Types of Stocks you invest in (i.e. Large Stocks and Small Stocks etc.)
• Expected size of a Drop - the most likely extent of any upcoming Drop.
• Time and Hassle involved - Whether or not you have the time available to do the Selling and Buying back later and whether or not you consider it worth the ‘Hassle’.
• Your Skills at timing the Selling and Buying of the Individual Stocks.
• The Percentage of your Portfolio that you Move into Cash - perhaps it is the more the better although that means it is harder to Buy back into the Market when the Rebound comes.
• The ‘speed’ of any Drop in the Market and the speed of any Rebound. This of course is pretty much impossible to know in advance and this is a great example of a Factor that is very important yet really you cannot know it beforehand and you have no Control over it. This is crucial because if a Market falls very fast you will not have time to Sell Stocks in advance without taking quite a hit and when the Rebound starts you might not be able to buy back in fast enough. In such scenarios forward Planning is essential and well before the Drop you should have a Plan in place with regards to what Stocks you are going to Sell and the amount of them you are going to Sell. Likewise, in anticipation of the Rebound you need to have a Plan about what you are going to Buy and in what quantities. This makes a big difference because as you may have realised from the Scenario Models I ran in earlier Parts of this Blog Series, selling Stocks just a few Percent too late or buying back in just a few Percent slower than ideal, can have a huge impact on your overall Returns.
• Personal Psychology - perhaps the most crucial element however is your own psychological make-up and ability to mentally withstand the damage that your Portfolio could endure if you do not Move into Cash or Hedge and there is a big Drop in the Markets as we saw at the tail end of 2018. It is so important to Invest in a way that you are comfortable with because if you fail to do this then you will suffer a lot of stress and angst. Related to this is the requirement to Plan ahead and to never get in a situation where you are forced to make costly snap-Decisions which are rarely a good idea.

I think it is really important to consider the ‘Knowable and Unknowable’ elements here as well. For example, the Size of your Portfolio is clearly Knowable and under your Control, but the extent of a forthcoming Drop is entirely outside of your Knowledge or Control - you can guess at the depth but it is unknowable. Therefore perhaps you shouldn’t be worrying too much about it and it would be better to focus on holding Quality Stocks for the Long Term.

For me the Time and Hassle factor loom large and also I am a strong believer in letting my Winners run. On that basis I am far keener on Hedging my Portfolio by using Index Shorts and although this is certainly not easy, it means I have far fewer Decisions to make and it can work very much like an ‘On/Off’ Switch - so the speed of putting a Short Hedge on and taking that Short Hedge off is extremely fast. This approach is hugely reinforced when I look at many Stocks which I sold in the past due to an expected Market-wide drop, and I find that now they are often many multiples higher than when I sold them. It was a Short-term fix which had unfortunate and costly Long-term consequences.

Lessons from the Current Market
One of the key Factors regarding whether or not to ‘Move into Cash’ is the likely extent of a forthcoming Drop that we foresee in the Markets. At the time of writing this we are in the guts of the Brexit Deal Crisis and there is huge Uncertainty and a range of possible outcomes. For this reason I have hugely Hedged my Portfolio and I am extremely wary until we have some clarity on the way forwards - the potential for a disastrous ’Shock’ No Deal Brexit is considerable and I think it could batter the Markets in a big way if that happens. I would like to believe that the Politicians in both the UK and Europe had the good sense to avoid such a Scenario but frankly I don’t think we can (or should) trust them to get it right. An accidental fall out of the EU on ’No Deal’ WTO Terms could easily happen. 

With such a backdrop, People who ‘Moved into Cash’ a few Months ago are in a good place now - but of course there is a huge dose of Outcome Bias in that and its close relative, Hindsight Bias. Were they ‘right’ or just ‘lucky’?

As it happens I did not heavily move into Cash in the Summer but I followed a Strategy for all of 2018 of slowly reducing my Overall Exposure and building up my Cash - as you can see from my ‘Trades’ Page I have barely bought anything for a long time. Having said that, I wish I had sold more but of course that is not particularly helpful because of Hindsight Bias. I continually said I should reduce my Long Leverage but unfortunately I did not get around to doing it early enough - that was clearly a huge mistake as I had recognised the problem but failed to act.

In reality we have to take a judgement on the likely impact we foresee from a Drop in the Markets and we need to be ready to move Cash back into the Markets very fast because once the Rebound starts, it is likely to be very rapid and failure to deploy Cash could be costly. This is partly why I like to Hedge because it works like a Light Switch and I can in effect turn it On and Off pretty much instantly.

If you keep abreast of my ‘Weekend Markets Blogs’ which sit on the WD2 Website, then you should be able to track how I have done with my Hedging and what my thoughts are as we move forwards.

Control what you can Control……
However, despite what I have just written above in this ‘Conclusion’ Section, I think it is extremely important for me to reiterate that in a way this Blog has 2 Elements to it - partly the Ins & Outs of ‘Moving into Cash’ but really this is just a mechanism by which I can illustrate the bigger and more important Concept of ‘Control what you can Control’ and the much related ideas of ‘Certainty and Uncertainty‘. So to turns things around here I want to just repeat the bits I wrote much earlier in this Blog Series about how vital it is to realise that there are many things about Markets over which you have absolutely Zero ‘Control’ and that there are other things that are very much in your Control - and it is critical to focus your Brain Power and Efforts onto addressing these Controllable Factors and making sure that you do not waste time or even Emotional Angst worrying about things you can do nothing about anyway. 

The idea behind this Blog Series is that there is a countless amount of Factors and Events etc. that occur daily in the Markets and by extension in our Portfolios, and over which we have no control - or at best very little. However, there are some things over which we do have total Control or perhaps a very high degree of Control and as with all complex systems it is vital that we fully Control everything where we do have the power to do just that.

If you find the whole concept of having to face up to dealing with stuff you cannot Control troublesome and your Brain struggles with the idea of ’fuzziness’ and you like things that are absolutes, then you need to create a System by which you do have more Control - for example using Stoplosses introduces a Level of Control that is higher than for people who do not use them - but of course you need to understand and appreciate the drawbacks of using Stoplosses as well or this will just become yet another Problem for you to cope with. If you go back to Part 1 of this Blog Series it should give a bit more flesh around the subject of Controllable and Uncontrollable stuff.

It is important for me to stress this - Investing and Trading the Markets requires you to be comfortable with swimming around in a highly unpredictable and changeable sea and you need to have (or to develop) a Mindset that means you can keep calm and objective when you go through a series of successive knocks (sadly, this does happen). If you cannot do this, then you will get extremely frustrated and Cognitive Dissonance will explode your Brain.

It has been enjoyable producing this Blog Series because I think it is the sort of Practical ‘Real World’ stuff that is remarkably rare (I have never read anything written by a Private Investor in this way) and the only stuff that is similar is usually Academic Guff and they are often limited to a Word Count (no such problems on my Website LOL) and it ends up confusing and far too ‘High Brow’ and lacks relevance to what we actually do Day to Day in the Markets. I am also intrigued because the Result I got when running the 10% Drop with allowance for Timing Issues of 3% on a £250k Portfolio of 40 Stocks really surprised me.

I hope it makes sense for Readers - I realise I could have laid out the examples in a better way but in the end I just tried to write a logical flow. If I had shoved loads of Equations and stuff in you would have hated it !!

Regards, WD.


Related Blogs
Here are Links to the earlier Parts of this Blog Series:

http://wheeliedealer.weebly.com/educational-blogs/certain-uncertainty-control-what-you-can-control-and-moving-into-cash-part-1-of-5

http://wheeliedealer.weebly.com/educational-blogs/certain-uncertainty-control-what-you-can-control-and-moving-into-cash-part-2-of-5

http://wheeliedealer.weebly.com/educational-blogs/certain-uncertainty-control-what-you-can-control-and-moving-into-cash-part-3-of-5

http://wheeliedealer.weebly.com/educational-blogs/certain-uncertainty-control-what-you-can-control-and-moving-into-cash-part-4-of-5

http://wheeliedealer.weebly.com/educational-blogs/certain-uncertainty-control-what-you-can-control-and-moving-into-cash-part-5-of-6

Here is a Blog Series I wrote about Spreadbetting (there are Links at the bottom to the earlier Parts):

http://wheeliedealer.weebly.com/educational-blogs/how-to-use-leverage-safely-and-successfully-spreadbetting-and-cfds-part-7-of-7

Dealing with Bear Markets:

http://wheeliedealer.weebly.com/educational-blogs/taming-the-bear-how-i-handle-nasty-markets

http://wheeliedealer.weebly.com/educational-blogs/a-2-minute-blog-on-bear-market-rules