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Stock market crash: is it too late to switch to defensive funds?

Since the stock market crash, I still read recommendations for defensive and balanced funds – but isn’t it too late for that?

Since the stock market crash, I keep reading recommendations for switching to cash and different types of defensive or balanced funds. But isn’t it too late for that?

If I switch my portfolio to this now, I will only crystallize the losses and miss any bullmark recovery. Even when new money is invested, choosing these funds reflects the belief that the stock market is ready, or that structural volatility will stay here, right?

Because if you still think the market is going to rise in the next 10 years, should you invest in funds that benefit from that?

Is it now defensive to close the stable door after the horse has been bolted?

Is it now defensive to close the stable door after the horse has been bolted?

Chartered asset manager Adrian Lowcock, Head of Personal Investing at Willis Owen, says: Switching to a more balanced strategy now may mean that you will incur certain losses and may not participate as fully in any stock market recovery.

However, you should know that this market sale is complete and that the market need not go down further. Short-term market movements are very difficult to predict.

As such, a balanced approach would help protect against further stock market declines. This would mean that if the stock market falls, the value of your investments doesn’t drop as much and you or the fund manager could sell some of the high-performing investments and reinvest the money at the lower levels into the stock market.

This diversification helps reduce volatility in the value of your investments and protects capital. It’s much easier to grow your portfolio if you haven’t lost 30 percent in the first place.

While the stock market has been a good place to invest in the long term, this is not always the case and there are no guarantees. Volatility is a constant and important part of investing and as we have seen, market crashes can happen at any time, are not easy to predict and can have a big impact on your assets in the short term.

“Short-term market movements are very difficult to predict”

It may not matter if you don’t need the money for 20 years or more, but approaching or retiring could permanently affect your income on retirement.

Not everyone is comfortable taking the same level of risk, and the recent sell-off in the market may be the first time they have experienced the downside of investing in stocks and shares. Such volatility in their investments can mean they don’t sleep well at night and that risk just isn’t for them.

A balanced or defensive fund helps to reduce that risk to a level they are more comfortable with, while still getting some exposure to the opportunities offered by the stock market.

If you think the exchanges will perform in the next 10 years then you may want to put a lot of your money into it. But you have to ask yourself how sure are you, can you guarantee it and how can you be sure there won’t be another crash?

A balanced approach and defensive funds are a way to spread the risk and put insurance in the portfolio in case you are wrong.

John Betteridge, Chief Investment Officer at Rowan Dartington, says: Investing for growth is not always the right strategy.

After the 15 percent drop in yields from peak to now in the U.S. as a result of the COVID-19 crisis, that may still represent a buying opportunity for some. A passive investor may believe that the balance of risks for the next ten years can now surface and invest accordingly in equities.

However, some will have neither the risk appetite nor the loss ability to invest all their financial wealth in shares. If so, there should be a balanced exposure between growth and more defensive asset classes.

Within that balance, the most appropriate geographic and sector exposure to equities is an option to maximize return under constraints.

This may involve splitting a longer term objective into a series of shorter periods. During periods of uncertainty, such as now, time frames will be shortened with the aim of reducing risk exposure to dynamic market risk.

Expanding from here to stocks would therefore assume the worst is over and the relationship rally is sustainable. Our analysis shows that the rally in the US has few cyclical factors (apart from technology) and may not be sustainable without a widely supported recovery.

Therefore, some defensive positioning may be required even within a balanced mandate.