But views diverge on what happens next. Some brave souls are poking a tentative toe back into the water, convinced that the mini-correction was a squall rather than a storm, and has therefore offered up a nice opportunity to add to holdings in their favourite companies more cheaply. Others still believe that building up a cash buffer in case markets turn choppy again is the most sensible course of action right now.
Putting the market events of last week to one side, and it is clear that a trend towards cash has been developing for some time. As the writers on the FT’s newly launched Asset Allocator service noted this week, on average fund managers surveyed by BoA Merrill Lynch are sitting on cash levels “well above” the typical level seen over the past decade.
That’s a bearish sign, although according to the survey’s authors not enough to really suggest a widespread dampening of appetite for risk assets. Indeed, the Asset Allocator team’s own data shows a wide range of cash weightings across the discretionary fund managers it surveys, from 0.5 to 20 per cent.
That, they say, could mean some significant divergence in performance ahead, depending on who is right. Those trading through wobbly markets with gritted teeth could do much better than those shifting to cash if markets hold firm; a further correction will see those holding cash do much better, and ready to pounce on oversold assets once calm returns.
This trade-off is something private investors should consider in their own portfolios. But conflicting investment wisdom on when to cut and run – if at all – offers few clues as to which approach will do better. Some of that could simply boil down to making the right call, and that decision could be entirely down to luck. Although not impossible, market timing strategies are notoriously difficult to get right for professionals and amateurs alike.
And investors shifting to cash have a further danger to worry about: not only losing out on returns by calling the top too soon, but compounding that error by buying back in to a continuing downtrend. Shares that have fallen heavily could still have further to fall if industry trends have turned against them, or weakening market sentiment leads to a more general downward re-rating.
Either way, you would have to be an unusually stoic investor to not consider what may happen to one’s wealth in the months ahead, and to be looking for ways to protect it – especially if for various reasons portfolio liquidation is not an option. For those uncomfortable using options to hedge against market risk, a portfolio review to weed out any particularly high-risk exposures would be a timely task to undertake.
