‘Move to 50% cash’: Red alert time for investors, says BRIAN DENNEHY

Brian Dennehy is managing director of research platform FundExpert.

After Russia’s invasion of Ukraine earlier this morning, we are recommending that investors move to 50 per cent cash.

It is a time of red alerts, and not just the weather. Red alert for markets, for Ukraine, for energy prices and supplies, for inflation, and for supply chains.

That there is a sweep of vulnerabilities is well understood by Vladimir Putin. This means that now is a sweet-spot for Putin to fulfil his ambitions (though precisely what those might be remains unclear).

Market falls of 50 per cent and more can be expected, particularly when you factor in the other crises mentioned above.

Here is a 10-step action plan for investors now Russia’s invasion of Ukraine has begun. 

1. Decide IMMEDIATELY whether your attitude to investment risk has changed

Most self-directed investors do not address the issue of risk very well.

Partly this is because a 40-year bull market has made investors (and the investment industry itself) complacent about risk.

Most of the time your attitude to risk might be robust, and wrapped around your natural optimism – this drives your attack.

But then when you are confronted with some new facts or evidence, this can be a rude wake-up call, and one which should be taken seriously – this means re-focusing on your defences.

You must now address the following steps, which will add much greater clarity to your risk management and your defences, and definitely reduce stress. 

2. Accept the possibility markets can go down to a level which does not fit with your life plans

You must start with this important mental adjustment. You do not need to know when this might happen or why – just accept the possibility

You must allow for risks without precedent which, if they occur, might destroy your life plans.

Once you have acknowledged this, the following steps are much easier.   

3. Make a plan to deal with your investments falling

Here’s why. Imagine the value of your £100,000 portfolio falls to £70,000, down 30 per cent. You do nothing.

It recovers a bit, and then falls again, now down 50 per cent. It recovers a bit over a few months, then down again, now over 60 per cent. This pattern repeats.

It repeats over a number of years – remember the Japan problem. Their stock market is still below the peak of 1989, and during this 30-plus years suffered falls of 80 per cent-plus at worst.

How would you feel if this repeated? Your portfolio probably represents a lifetime of carefully accumulated wealth, for which you worked bloody hard.

If this is a shock you would rather not experience, you need a plan with some very specific action points. Let’s look at those now. 

4. Reduce the number of your investments, whether funds or individual stocks

Cut this to a maximum of 15, but as low as possible. The more holdings you have, the harder you will find it to take action when markets fall. This will help you with the next task. 

5. Apply ‘the overnight test’ – simple but powerful

Assume someone sold all of your investments tonight without your knowledge, and tomorrow you woke up with 100 per cent in cash. Here’s the test…

Russia has invaded Ukraine, pictured above in a time of peace

You can re-purchase the same investments at no cost. Which would you re-purchase? What changes would you make?

Go practice some selling now. Practice makes perfect. 

6. No fund holding should have a value less than 5 per cent of your total portfolio value

If the value of any one fund is less than 5 per cent of your total portfolio, it is highly unlikely to have much impact on the progress of your portfolio as a whole – so have a smaller number of fund holdings, of greater value. 

7. Once extreme valuations and behaviour are evident, increase cash levels

Ditto any other extreme risks. We have faced pandemic risk. Now there is war risk. 

8. Have a clear stop-loss strategy and make sure you apply it

With a stop-loss you literally stop your loss from getting bigger.

For each investment, decide how far the value must fall to trigger you selling it.

For example, is it 5 per cent or 10 per cent or 15 per cent? We have researched this in detail, and crunched numbers over four decades.

There is no perfect answer, but an effective level appears to be 10 per cent.

Selling when values fall 5 per cent means you continually get whip-sawed in and out of markets.

In contrast, if you set the level at 15-20 per cent or higher, you are much less likely to act on the stop-loss trigger, because the loss is too painful, so 10 per cent works well.

Write this down for each investment (fund or stock). Do this in a moment of relative calm. This is pre-commitment and makes it more likely you will act when the time comes. 

9. Don’t go on holiday and be out of contact with markets if you have large investments

Make sure you have all your account details and holdings with you in paper form. If you normally only trade online, ensure your broker or adviser will have a telephone dealing service. 

10. Keep on top of the practicalities

Know what time of the day your broker or adviser trades in funds. If they trade funds at 8.30am and you ring at 9.00am, you are already 24-48 hours behind market prices.