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Is it Time to try Timing the market?

January 31st, 2007 at 11:43 am

Although my preferred strategy is a "high-growth/high-risk, buy-and-hold, stick to your asset allocation" one, there comes a time when the market starts to look a bit too high to any dispationate observer. The pundits are still saying that the Australian stock market isn't cheap but isn't too expensive either, based on historic p/e ratios and company profitability outlook. Then again, they're saying that after three consecutive years of total returns of 20%+ the best they expect this year is around 10%, so the upside seems limited, while the downside risk has obviously increased from what it was four years ago. Looking at the chart for the All Ordinaries Accumulation Index since 1980 the current market rise looks a lot like 1987 - and we all know how that ended up!



Anyhow, the Superannuation (retirement) account for my son was invested with the following asset allocation:
80% Geared Australian Share Fund
20% International Shares Fund
This allocation has performed very well since I opened his account four years ago, with returns of:
FY 04/05 25.3%
FY 05/06 42.0%
I figure that having gotten off to such a good start DS1 can now afford to move to a more conservative, high-growth asset mix (even though at age 6 he has another half century before he reaches retirement age), so today I sent in the paperwork to change his investment mix to:
30% Australian Share Fund
10% Australian Small Co Share Fund
20% International Shares Fund
20% Property Securities Fund
20% Australian Bonds Fund
This is still a high-growth, high-risk allocation (with 60% in stocks) so it should provide a good rate of return over the next 50 years, but at lower volatility than the previous asset mix. If there's ever a significant (30%-50%) correction in the Australian Stock Market I'll think about moving some funds back into the geared Australian Share Fund again. I think this weak form of market timing is called "dynamic allocation" - but it's still just a guess no matter what you call it.
* * * *
The current market also has me a bit nervous about my Australian Share Portfolio. I have two margin lending accounts holding $540K of Australian Shares, with a loan balance of $263K, so a severe market correction would have a big impact on my Net Worth! I'm toying with the idea of buying some PUT options on the ASX200 Index as insurance against a major market correction occurring between now and the options expiry date (21 June 2007). For $12K I could buy enough Options to offset any losses where the market drops below 5500 (it's currently at about 5750). The simpler option (excuse the pun) would be to just sell off enough of my portfolio to pay off the margin loan balances - but the interest has been pre-paid until 30 June 2007, so I'd be throwing five months of interest payments down the drain if I paid off the loans now. I also have reasons for not wanting the realise a capital gain prior to 30 June.

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