Planning For The Great Share Price Apocalypse

Published in Investing on 2 May 2012

Can you afford to wait until the end of the world?

Once you start believing in the Apocalypse, it can take over your life. You might just end up on a windswept hillside with a huddle of like-minded souls, staring at your watch, waiting for the end of the world.

When the world doesn't end, you will either feel silly, or claim you got your dates wrong.

That doesn't stop people such as Robert Prechter. In June 2010, the gloomster pundit predicted the Dow Jones index would fall to 1,000. Yesterday, it hit a four-year high 13326.

Fools on the hill

Plenty of otherwise sober souls have been predicting the 'Great Share Price Apocalypse' ever since the first meltdown, in autumn 2008. That wasn't quite the end of the world, although at times it felt like it.

There have been moments when I've been tempted to hunker down on a windy hillock and await the end of days. Judging by your comments below the line, I would find plenty of Foolish company up there.

Horses for courses

The four horsemen of the Apocalypse are still circling markets. Leading the charge is that tiresome old nag, the eurozone crisis. You have to admire its staying power, if nothing else.

The fabled China hard landing is breathing hard at its shoulder, closely followed by the US fiscal cliff (when the Bush-era tax cuts expire at the end of the year) and, finally, conflict in Iran.

There is also the rank outsider of a shock 40% currency devaluation by the Bank of Japan, much feared in China, whose export industries could get trampled in the stampede.

This summer could go one of three ways:

1. Muddling through

Somehow, they glue the eurozone together with another splodge of liquidity. China and the US live to fight another day. There is an uneasy peace with Iran. Doomsday averted, but investors remain wary.

2. Shock recovery

The European Central Bank loads up its big bazooka and markets soar on a mountain of freshly minted euros. The US consumer rides in to save the day, and the Chinese export miracle resumes.

3. Oops, Apocalypse!

Club Med electorates finally snap. The single currency splits asunder, and markets burn. The US hits that cliff and China goes the way of all property bubbles. Israel bunker-bombs Iran's nukes.

So which is it to be? Quite frankly, I don't know. You don't know. Ben Bernanke doesn't know. Nor do George Osborne, Mario Draghi, Francois Hollande or even Warren Buffett. Nobody knows.

So how do you respond? You could simply leave all your money in cash, but that only guarantees that it will fall in value, in real terms.

Given three possible outcomes, I've developed a three-pronged response:

1. Saving a little every month

I've set up a direct direct to the low-cost unit trust HSBC FTSE 100 Index fund, which has a low total expense ratio of just 0.27%. Every month, the money buys more units in the tracker, at the prevailing price. This means I don't have to worry what markets are doing. If they rise, I buy. If the bump along, I buy. If they crash, I buy.

As I'm only committing a relatively minor amount each month, I can't really lose.

2. Buying on the dips

This is a bit trickier. If the market falls 1% or 2% in a day, or a target stock falls 4% or 5%, it's very tempting to hang on one more day, to see if it becomes cheaper still.

Still, I'm targeting blue-chip stocks yielding between 4% and 6% by topping up my holdings in Aviva (LSE: AV), GlaxoSmithKline (LSE: GSK), Ladbrokes (LSE: LAD), Royal Dutch Shell (LSE: RDSB) and Vodafone (LSE: VOD).

If markets fall, I get that inflation-busting yield. If they rise, I get capital growth as well.

3. Keeping some powder dry

I'm not committing all my money. If the Apocalypse does come, I want plenty of ammunition. As any Fool knows, a stock market meltdown is a great buying opportunity. It certainly was in March 2009. If there is another share price Apocalypse, it could be the buying opportunity of a lifetime.

Investing is by no means easy in today's uncertain economy. That's why we've published "Top Sectors Of 2012" -- our guide to three favourable industries. This free report will be dispatched immediately to your inbox.

Further investment opportunities:

> Harvey Jones owned shares in Aviva, GlaxoSmithKline, Ladbrokes, Royal Dutch Shell and Vodafone.

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Comments

The opinions expressed here are those of the individual writers and are not representative of The Motley Fool. If you spot any comments that are unsuitable hit the flag to alert our moderators.

Cyfran101 02 May 2012 , 8:05pm

Its the USA debt that really worries me. Those trillions they own are weighing heavy and we have seen the first stumble under the weight when they failed to agree a budget. Not expecting the USA to collapse imminently but its worrying how addicted to credit they are. $138,000 owed per taxpayer, they better get saving. http://www.usdebtclock.org/

goodlifer 02 May 2012 , 8:18pm

It seems to me sensible to pay no regard to anyone who tries to tell you what the market's going to do, and just carry on reinvsting your dividends, together with any spare cash you may happen to have.

Providing of course there's something out there worth buying.
There generally is, so long as the indices stay reasonably low.

DirtyDollie 03 May 2012 , 9:12am

"If markets fall, I get that inflation-busting yield. If they rise, I get capital growth as well."

Surely you should calculate your own yield based on you purchase price, rather than current price?

goodlifer 03 May 2012 , 11:26am

DirtyDollie

"Surely you should calculate your own yield based on your purchase price, rather than current price?"

Too right.

The yield of my current stocks does indeed depend on what I paid for them, and I'm quite happy with that.
And the lower Footsie deep-sixes the better the yield on my reinvested dividends, which makes me even happier

jellycat 03 May 2012 , 12:56pm

I have 5 years to retirement and am fed up with financial advisors talking my money - I;m a beginner at investing and want to invest in good solid defensive blue chips that pay divs - like all the stuff I read advises me to do but have no idea how to find them - can anyone help?

eccyman 03 May 2012 , 12:56pm

#Cyfran101

The US will be OK. Two things are riding to their rescue, just in time

- Their shale gas will mean energy independence and they can pull out of the Mid East.

- New technology such as 3D printing will mean manufacturing returns to the US

GoldenSoldier 03 May 2012 , 1:18pm

As a defensive investor, I am inclined towards Benjamin Graham’s advice to aim for an allocation of 50% in shares & 50% in cash or high grade bonds, but never to exceed 75% in shares. This gives one the opportunity to take advantage of an apocalypse.

Over a lengthy period I have built up a holding of about 30% in National Savings Index Linked Certificates. The real return of many so called “income shares” is usually greater, but not by an amount which I judge to be sufficient to justify the risk.

sageofnw6 03 May 2012 , 1:41pm

1) all the wealth in the world is generated by individuals / businesses. Governments just harvest a share of that. If companies stop making money then government backed paper (cash or bonds) lose value just as the companies shares lose value.
2) In the current environment, if there are large market falls central banks will print money.
Whilst individual company shares are risky there is little reason to see why they, as a class, should be riskier than cash or government backed bonds

GrahamMiller0 03 May 2012 , 1:51pm

@Eccyman,

The UK is also sitting on a 70 year supply of shale gas and there's no reason why 3D printing shouldn't mean manufacturing returning here either.

theoldone1 03 May 2012 , 2:36pm

If its the end of the world then doesn't matter how much money I've got or what in it'll be worthless and a shotgun might useful. If its just a catstrophe then I'll want to go in and buy some shares at the knock down prices which will be around then and look forward to an enhanced retirment. Most likely is that we'll muddle through and I'll still have my divdends etc to keep me warm. As life isn't certain I've got shares with different providers in case someone in financial services tries to run of with my savings, but other than that I plan to have as little to to do with IFA's, pension companies and their high fees etc as possible.
Unfortunately the biggest real risk I see is that politicians will promise the earth to get elected and then use other people money i.e. the retired and savers, to pay for it. The technique which has been used is to create a bit of inflation so effectively the tax take increases, more people fall in to 40% tax bracket, So whatever you do has to take account of inflation. The only thing which does that long term is shares.

BrnzDrgn 03 May 2012 , 2:42pm

It already happened, I missed it so I am just muddling through!

Smibby 03 May 2012 , 2:55pm


I read today that oil inventories in the US are nice and high at the moment.

Ok.

Good idea if the Straits of Hormuz creates a problem.

Could be a coincidence.

I have looked out my tin hat in the attic.Just in case.

goodlifer 03 May 2012 , 4:26pm

jellycat

"I'm a beginner at investing and like all the stuff I read advises me to do but have no idea how to find them - can anyone help?"

It would be stupidly arrogant of anyone like me to offer any advice, but, FWIW, here's some of the story of my fascinating investment life.

I began to play the Great Game about 3 years ago, mainly because I didn't want my meagre savings to be eroded by inflation

My time horizon is around 10 years, or hopefully more, and the idea is to leave my better half a bit of a boost to her income when I move on - I'm now 84 - to that Happier Market in the Sky.

At first I was a wannabe speculator, hoping to make my fortune by smart, tax-free capital gains.
Then I chanced upon Ben Graham, and "The Intelligent Investor" has been my bible ever since'.
My two favourite mantras are pupil Warren Buffett's:"My favourite holding period is for ever," and his Rule 2.

Apart from our home and a wodge of cash, to cushion us against the inevitable pinpricks and toothaches of outrageous fortune, all our spare money goes into equities.
We've built up a portfolio of about 15 blue or bluish chips by trying to buy into decent companies costing 12 or less times earnings and yielding 4-5% or more.

So far we've ploughed back every penny of our dividend payments, but we're just beginning to think we can afford to spend some of them.

Unfortunately company accounts are all Greek to me, which is just one of the reasons I'm such an avid reader of the Motley Fool.

I've also had quite a bit of help from arguing with my brother, who's been at it for three or four yours longer than me - even though we don't always agree.

All seems to be going OK at the moment, but you never know what's round the next corner or in the next street.

Remember the words of the great Sylvanus P.

WHAT ONE FOOL CAN DO ANOTHER CAN

Good luck!




ANuvver 03 May 2012 , 5:26pm

jellycat:

Seems like you've already learned one of the most important lessons. Stop paying to keep the "experts" in suits and season tickets.

Unfortunately, as you say, that leaves you out on your own. Taking responsibility (and therefore only having yourself to blame) is daunting and it changes you. It would be unethical of me to offer advice, so I'm going to anyway.

Read up. Your first investment should be an armful of books. I agree with goodlifer that Ben Graham is a good start, but there are plenty of others. I would say you're best looking for those texts that are recommended for a no-nonsense approach - the principles of investment are quite straighforward. Or they should be.

Tim Bennett at MoneyWeek has an excellent accessible series of video presentations covering everything from P/E ratios to QE, LTRO and all that jazz.

Take a Socratic approach. Be your own IFA. Ask yourself what your goals are, what your time horizon and attitude to risk are and so forth. When they say investment is different for everyone, they're not just flimflamming, it is true. You have to be clear about your objectives. You can always change your mind as you go along. There's an old chess maxim - a bad plan is better than no plan.

Tidy up what you already have before you start worrying about acquiring something else. In your situation, with 5 years to go, I would suggest you shine a hard unforgiving spotlight on your pension, debts, mortgage, etc before you do anything else.

Don't try to beat a benchmark or make a killing in underwater internet toasters. Aim to achieve what you need. Then you can have the odd punt on asteroid mining.

I'm still a believer in the conservative defensive income approach, but many others think it's getting a bit frayed round the edges, and some of the arguments are very persuasive. You have to have your own view, and that view should be strong enough that you can ruthlessly question it and flexible enough that you might be willing to change it.

Hope this helps. It's a learning experience, which should be enjoyable and stimulating. And hopefully not too painful. Best of luck.

GeorgeJHarney 03 May 2012 , 9:55pm

jellycat: You have plenty of options when it comes to DIY investments.

First, is a 'platform' good for what you want - there are a few choices out there, with Hargreaves Lansdown being one of the biggest but depending on what services you use it charges slightly more than some others (I use it though).

Individual shares can be risky, but I think the likes of Unilever are reasonably safe bets - good dividends and the possibility of sustained growth in emerging markets.

Lastly, I would suggest that your investment horizon is actually longer than 5 years - yes, you may retire then, but with life expectancy these days you may with luck have another 30 odd years on this planet, so you need to potentially think in terms of longer investment choices for growth as well as immediate income.

However, you may want to pay some reasonable management charges for diversified risk, in which case some good Investment Trusts (as opposed to generally more expensive unit trusts) should be on your shopping list - Edinburgh IT run by Neil Woodford has low charges, a good track record and a defensive strategy. For ultra defensive look at the Personal Assets IT, or Ruffer perhaps. Then there are funds run by Nick Train - Finsbury Growth & Income or his own Lindsell Train IT are all worth a look.

There is plenty of discussion on the boards of this site for defensive or income IT's that are well worth a read.

mcturra2000 03 May 2012 , 10:11pm

But what if the Apocalypse doesn't come, you might have been off by investing now? 2007-2011 have had a lot of volatility in them. 2012 hardly any. For all anybody knows, the next 3 to 4 years could be very stable, and you wont get the market meltdowns you're hoping for.

jackdaww 05 May 2012 , 9:16am

jellycat

yes - dump your IFA'S etc.

if you click on jackdaww f958b and many others - they have a list of shares they are in plus investing tenets.

a good starting point.

but dont overpay - a margin of safety is beneficial so patience is required.

for example the likes of diageo, unilever are not cheap at present - although they may never get any cheaper!.

vodafone tesco morrisons bhp are ok now i think and possibly greggs and BG.

goodlifer 06 May 2012 , 4:17pm

"I'm not committing all my money. If the Apocalypse does come, I want plenty of ammunition."

This looks like a losing tactic for anyone who, like me, is trying to build up a reasonable portfolio of decent shares..

Right now we've got a buyer's market - respectable shares are available for sensible prices, and it makes sense to buy as many as I can while I've got the chance.

If Footsie flops any further I'll still have reasonable dividends, and be able to reinvest them at bargain basement prices.
Not too bad a result.

If Footsie goes up I'll regret I didn't buy more. It's true I'll have a bit of a paper profit, but there'd be little point in selling anything unless Footsie rocketed to a stupidly astronomical height.
A pretty lousy result.

Obviously if I were really convinced Footsie would plummet in the foreseeable future I'd sell everything now, with a view to buying back when the time was ripe.
The best possible result.

I'm content to settle for what looks like the best result possible.
.

goodlifer 06 May 2012 , 9:06pm

jellycat:

"Read up. Your first investment should be an armful of books."
Overdoing it a bit?

For some reason there seem to be more people around falling over themselves to tell you how to make money than actually make money themselves.
Investing is a down to earth, practical problem - get it wrong and you lose money, and there's a limit, in my view, to what you can learn from bookishness..
Who wants to be the unlucky expert?

Apart from Great Uncle Ben, I more or less stick to the saws and soundbites of Warren Buffet and Charlie Munger..

A book I do rather like is Martin Gardner's "A Mathematician Looks at the Market."
Good fun, if you like that sort of thing, but not a lot of use.

Like an even greater mathematician, Isaac Newton, Mr Gardner was apparently taken to the cleaners.

ANuvver 06 May 2012 , 10:33pm

goodlifer:

Fair point. Grahamism is my thing too, but everyone has to make up their own mind, so I'm loth to recommend anything in particular. I've read a lot of books on finance etc, and I learn quite a lot from the ones I don't agree with.

I will admit that in my previous life in journalism I earned far more reporting on investment than I did from investing. But it wasn't whizz-bang, Crazy Larry, "this is a screaming buy" stuff.

I alos agree that investment needn't be complicated, even though investors tend to be!

goodlifer 06 May 2012 , 11:50pm

ANuvver
"Everyone has to make up their own mind,"
Got it in one!
.
"It wasn't whizz-bang, Crazy Larry, "this is a screaming buy" stuff."
What was it?

ANuvver 07 May 2012 , 5:36pm

Company, sector and political/eco news, mainly.

YeeWo 08 May 2012 , 3:08am

The lectures that Buffett gives on Youtube are well worth watching as they are both entertaining and really give a rational and workable definition of Investing.

I have read Graham, but considering the length of time ago it was written it does come over as a bit abstract in 2012. Quality seldom comes cheap!



goodlifer 08 May 2012 , 9:44pm

Thanks, ANuvver,
With a background like that you should gave no problems!

mrburns2050 13 Jun 2012 , 8:15pm

Enjoyed reading every ones comments cheers.

I to have read Graham and a couple of books on Warren Buffet. Bought a couple more but they shone no new light. I tend to read motley fool every day (do enjoy peoples comments too).

My investments will be my pension. A few years ago i left a job that had a final salary pension. So went to a IFA that wanted me to take out a pension with Scottish Widow. After reading it became apparent that they were going to put my money into funds and charge me for the privilege.

So to cut out the middle man I bought funds direct mostly in income funds

After looking into the income funds and FTSE funds they all seem to invest most of there money in the same 10 - 15 companies. So again to cut out the middle man and needless expense. I started investing direct through a internet brokerage account using there £2 trades.

I intend to hold my shares for as long as i will live at the moment all divs are reinvested but in years to come will hopefully use this as a "living wage"

I look for companies that yield 3.5 or higher that i believe have sustainable profits.



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