Make money when markets fallPosted on: 24 August 2011 by Chris Rowe
With the market in turmoil it is difficult for investors to know where to turn to
Investors are subjected to considerable noise, so much so, they don’t know who to believe. No sooner will a positive sentiment arise than a negative view of the same noisy information makes the markets plummet.
For some, the ostrich approach works, for others, the exit door can prove expensive as they sell off their investment portfolio at cheaper than cheap prices, but for the canny investor, the protection of capital is everything.
There have been countless capital protected investments products designed which we have researched for over fifteen years, only to ask ourselves why we even opened the can as none of us like worms.
Most of these products are designed with the provider of the product in mind, not the investor. These products normally come via the name of structured products but are fraught with risks, charges and difficulties that we have covered before, and are available on our website. So far in the last 24 months we have yet to approve and sign off a single one – therein lies the message.
However with markets lower than they were in 1998, how can you have made any money?
The term ‘long’ refers to investing and leaving your capital invested and exposed to the ups, downs, lefts and rights of the market. As the markets have traded sideways for 13 years, however, this is not good reading when it comes to your personal investments or pensions.
Some capital protected investments protect your investments by blocking the capital falling below a certain point, but the loss of opportunity via not being able to access dividends and the restrictions on the upside of these investments as above, make them unattractive. For example, some stocks such as BT and Standard Life are offering sizeable dividends per year with BT offering 7.4p per share or c4.5% and Standard Life 7.2%. This is essential in giving you a return on your capital. A 3.5% dividend yield over the last thirteen years would have given you 56.39% return, a return you would have lost out on had you been invested in the aforementioned capital protected investments.
However, in today's highly volatile market, investors need to be a little more canny. Believe it or not, going ‘short’ is the opposite of going long. The term refers to the ability to ‘bet’ on something (a share price, a price of a currency) falling. So, if you thought the UK might suffer a downgrade, you might ‘bet’ on the FTSE 100 falling. Making these macro economic calls is beyond most, as the ‘bets’ can prove a daily event.
The average ‘long’ fund manager invests into many different global markets and simply holds, and there is little they can do to protect the assets from falling, as they have to stay close to the fund’s investments principles.
Other capital protected investments have the expertise and ability to do some pretty clever arrangements. For example, if you believed the Korean currency would remain weak, it would be good to expose your capital to Korean equities given its ability to export quickly to China (We do).
If you felt that the Australian interest rate rises over the last few years were overdone (we do) and had to be rebalanced, you might bet (sell short) on the Australian dollar falling.
You might also believe that the U.S. government will not get its act together for the next big decision, thereby meaning that a further downgrade may be possible, and as such you might bet short on the US dollar (big call, but we don’t think so).
You may, however, think that the Euro is under greater pressure as there are so many parties to keep happy with some of the bigger decisions it has to make and go short (we do).
You may also believe that most of the commodity prices (oil, gas etc) rises are driven by speculation and sell them short (we do).
And so whilst equity markets may have gone sideward or south you may well have made some useful money making the decisions above via the appropriate investment fund.
The values of shares and investments can go down as well as up.
Worldwide Financial Planning Ltd who are authorised and regulated by the Financial Services Authority. 'The FSA does not regulate Credit Cards, Will Writing and some forms of mortgage and Inheritance Tax Planning.'
Information given is for general guidance only, and specific advice should be taken before acting on any suggestions made. All information is based on our understanding of current tax practices, which are subject to change. The value of shares and investments can go down as well as up
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