Hedging a downturn
Discussion
Just been thinking about stuff and wondered if this is a real strategy and if so what is it called please.
Hypothetically lets say approx 30k had been dripped into a fund over 10 years and due to explosive market growth was currently worth 200k. In anticipation of a correction/crash/downturn, 50% are sold, and then the funds are repurchased over the next 5 years (so 2x the original purchase rate) with the sale money, alongside new funds (3k pa).
Now, the risk is if the market continues upward, you are buying your own units back at a higher cost.
The benefit is, conversely, as they drop (particularly suddenly) then you end up buying your units back cheaper.
There is also the cost of purchasing the units to consider (though purchasing is happening anyway - 3k pa).
Thinking funds specifically, not stocks.
Is this a thing? Not a thing? Daft? Its a bit like reverse-cost-averaging or something.
Thanks
Hypothetically lets say approx 30k had been dripped into a fund over 10 years and due to explosive market growth was currently worth 200k. In anticipation of a correction/crash/downturn, 50% are sold, and then the funds are repurchased over the next 5 years (so 2x the original purchase rate) with the sale money, alongside new funds (3k pa).
Now, the risk is if the market continues upward, you are buying your own units back at a higher cost.
The benefit is, conversely, as they drop (particularly suddenly) then you end up buying your units back cheaper.
There is also the cost of purchasing the units to consider (though purchasing is happening anyway - 3k pa).
Thinking funds specifically, not stocks.
Is this a thing? Not a thing? Daft? Its a bit like reverse-cost-averaging or something.
Thanks
I believe it’s called shorting the market and when I looked into it I thought it should be banned tbh.
I’ve never bought stocks and shares before but my strategy is to wait for a BIG drop and then invest for the long term.
Absolutely guarantee that I won’t be able to call the bottom of the market but there’ll be no strict timeline so I will guarantee that it’ll come good after 5-10 years. Just need to be patient.
I’ve never bought stocks and shares before but my strategy is to wait for a BIG drop and then invest for the long term.
Absolutely guarantee that I won’t be able to call the bottom of the market but there’ll be no strict timeline so I will guarantee that it’ll come good after 5-10 years. Just need to be patient.
I'm familiar with shorting (i think!) and i dont think this is it.
Basically going back to my original post, you get to a return level that you are happy with and that you are confident is likely to represent a point on the market that is either static or likely to drop, but with limited upside. Then you sell, and then buy back over a long period using the money from the sale, but you buy back at twice the rate as the original purchase.
At a certain peak, it can't go much higher without a growing risk of a drop, or stagnating. I believe stagnation would essentially be waiting for cash to catch up, so you are back in cash buying the units back at essentially the same price but the cash is worth more.
I dunno. I have a lot of time on my hands
Basically going back to my original post, you get to a return level that you are happy with and that you are confident is likely to represent a point on the market that is either static or likely to drop, but with limited upside. Then you sell, and then buy back over a long period using the money from the sale, but you buy back at twice the rate as the original purchase.
At a certain peak, it can't go much higher without a growing risk of a drop, or stagnating. I believe stagnation would essentially be waiting for cash to catch up, so you are back in cash buying the units back at essentially the same price but the cash is worth more.
I dunno. I have a lot of time on my hands
It's not shorting.
If this is outside an ISA the CGT implications won't be too pretty.
Time in the market is generally better than timing the market. Dollar cost averaging on the way in doesn't reliably produce better returns than buying in a lump, I would expect it to be the same on the way out too.
If your investment horizon has got shorter / you have no need for future investment returns just sell the lot.
If this is outside an ISA the CGT implications won't be too pretty.
Time in the market is generally better than timing the market. Dollar cost averaging on the way in doesn't reliably produce better returns than buying in a lump, I would expect it to be the same on the way out too.
If your investment horizon has got shorter / you have no need for future investment returns just sell the lot.
Its a thing.
I did it when Covid hit.
Sold everything in my ISA on the downswing and dripped it back in on the upswing. But I fed in over a much faster period.
Shorting is completely different.
The theory is sound but the premise is that on a cost average basis you sell at the point of the highest return and buy back in on average a % lower than that.
I guess its timing it, if we start to see a massive swing.
I did it when Covid hit.
Sold everything in my ISA on the downswing and dripped it back in on the upswing. But I fed in over a much faster period.
Shorting is completely different.
The theory is sound but the premise is that on a cost average basis you sell at the point of the highest return and buy back in on average a % lower than that.
I guess its timing it, if we start to see a massive swing.
halo34 said:
Its a thing.
I did it when Covid hit.
Sold everything in my ISA on the downswing and dripped it back in on the upswing. But I fed in over a much faster period.
Shorting is completely different.
The theory is sound but the premise is that on a cost average basis you sell at the point of the highest return and buy back in on average a % lower than that.
I guess its timing it, if we start to see a massive swing.
Yes agree, and that's why i was thinking it would be prudent only to sell half the overall pot, so you keep a stake and cost average back in over time.I did it when Covid hit.
Sold everything in my ISA on the downswing and dripped it back in on the upswing. But I fed in over a much faster period.
Shorting is completely different.
The theory is sound but the premise is that on a cost average basis you sell at the point of the highest return and buy back in on average a % lower than that.
I guess its timing it, if we start to see a massive swing.
But then, thats like an each way bet which i feel is a bit like betting against ones elf.
Edited by bmwmike on Friday 16th July 15:36
Not sure if it would be an attempt to time the market in the sense of making a sale and buying back lower, or attempting to lock in extraordinary gains from extraordinary times and minimise losses in latter half of investment period. Not sure if there is a difference either.
I guess another approach and perhaps better would be to sell half as per original post, but diversify back into the market out of technology and back into a more global generic tracker. In which case a lump sum rather than drip feed is better as more opportune before inflation and growth kicks in.
I guess another approach and perhaps better would be to sell half as per original post, but diversify back into the market out of technology and back into a more global generic tracker. In which case a lump sum rather than drip feed is better as more opportune before inflation and growth kicks in.
NickCQ said:
Time in the market is generally better than timing the market. Dollar cost averaging on the way in doesn't reliably produce better returns than buying in a lump, I would expect it to be the same on the way out too.
This really sums it up, nobody can accurately predict when there will be a crash or significant market correction. For full transparency I did throw a few wads into the S&SISA last year during the pandemic-induced market madness but otherwise I have given up on timing the market...I'd rather use a mix of random lump sum and drip fed contributions then let time in the market do its thing.I’d take enough to use up cap gains allowance (if you can) and indulge in the feeling of buying units cheaper if it comes down.
Then also start moving some into ISA wrapper (if you can), to make sure it’s all tax free in future.
Also I don’t know many people who were happy with a bad decision made by their head, rather than their heart. It’s always easy to blame not doing enough research, or trying harder. Or whatever.
If you’ve a feeling markets are over-valued, indulge in it at least a bit.
In the final analysis reality is random. Even at the smallest level by observing an event we change the outcome.
You cannot know enough information to make a fully informed decision. You will always fall back to your gut, or heart.
I’m about 80% cash in my pension right now.
20% of it has done well since March.
The risk vs reward looks perfect based around my gut feelings and I’m happy.
Then also start moving some into ISA wrapper (if you can), to make sure it’s all tax free in future.
Also I don’t know many people who were happy with a bad decision made by their head, rather than their heart. It’s always easy to blame not doing enough research, or trying harder. Or whatever.
If you’ve a feeling markets are over-valued, indulge in it at least a bit.
In the final analysis reality is random. Even at the smallest level by observing an event we change the outcome.
You cannot know enough information to make a fully informed decision. You will always fall back to your gut, or heart.
I’m about 80% cash in my pension right now.
20% of it has done well since March.
The risk vs reward looks perfect based around my gut feelings and I’m happy.
Mr Whippy said:
If you’ve a feeling markets are over-valued, indulge in it at least a bit.
In the final analysis reality is random. Even at the smallest level by observing an event we change the outcome.
You cannot know enough information to make a fully informed decision. You will always fall back to your gut, or heart.
I’m about 80% cash in my pension right now.
20% of it has done well since March.
The risk vs reward looks perfect based around my gut feelings and I’m happy.
This is the problem, in that markets have been over-valued by most commonly used metrics for a while, but as long as the Fed, BoE and other central banks keep printing money then all historical logic goes out the window. In the final analysis reality is random. Even at the smallest level by observing an event we change the outcome.
You cannot know enough information to make a fully informed decision. You will always fall back to your gut, or heart.
I’m about 80% cash in my pension right now.
20% of it has done well since March.
The risk vs reward looks perfect based around my gut feelings and I’m happy.
Depending on your time frame, then leaving the vast majority of your money in the market and "playing" with a small amount is, IMO, the best way to go. Anyone who says they predict short term market moves is generally wrong, and while some people call it right the indisputable fact is that most managed money funds under-perform, and so if professional managers can't do any better than simply investing and leaving alone has to be best for the average private investor.
Being happy with your decisions is hard, especially if you get it wrong. If you just have a nice diversified portfolio and accept that you know no more, and no less, than anyone else. it is much easier to be happy with your decision making than if you try and over think it, selling and then having to rebuy at a premium to what you had originally.
You can buy ETF’s that perform as the inverse of the market….I actually have one in my SIPP but it’s a short on US interest rates. So it goes up in value if long term interest rates in the US rise(bond prices fall). It’s a (small) hedge against the threat of rising interest rates. There are ETF;s that effectively a short on FTSE.
bmwmike said:
Not sure if it would be an attempt to time the market in the sense of making a sale and buying back lower, or attempting to lock in extraordinary gains from extraordinary times and minimise losses in latter half of investment period. Not sure if there is a difference either.
I guess another approach and perhaps better would be to sell half as per original post, but diversify back into the market out of technology and back into a more global generic tracker. In which case a lump sum rather than drip feed is better as more opportune before inflation and growth kicks in.
I think statistically you're better off lump summing so if you took out your profits and treated it as new money you're statistically historically better off dumping it all in.I guess another approach and perhaps better would be to sell half as per original post, but diversify back into the market out of technology and back into a more global generic tracker. In which case a lump sum rather than drip feed is better as more opportune before inflation and growth kicks in.
I've done your second approach before where I've taken the money from something like SMT and put it into something I consider less volatile.
RUSTILLDOWN said:
I believe it’s called shorting the market and when I looked into it I thought it should be banned tbh..
No, selling shares that you own isn’t shorting the market, it’s just selling some shares that you own.OP, what you are trying to do is predict the market and time when to buy and sell. You probably don’t actually know when the market will go up and down, but if you’re uncomfortable in shares right now then yes, selling is an option.
halo34 said:
Its a thing.
I did it when Covid hit.
Sold everything in my ISA on the downswing and dripped it back in on the upswing. But I fed in over a much faster period.
Shorting is completely different.
The theory is sound but the premise is that on a cost average basis you sell at the point of the highest return and buy back in on average a % lower than that.
I guess its timing it, if we start to see a massive swing.
Did you mention it at the time, or is this yet another amazing trade that only gets mentioned after the fact?I did it when Covid hit.
Sold everything in my ISA on the downswing and dripped it back in on the upswing. But I fed in over a much faster period.
Shorting is completely different.
The theory is sound but the premise is that on a cost average basis you sell at the point of the highest return and buy back in on average a % lower than that.
I guess its timing it, if we start to see a massive swing.
It’s amazing the fraction of market wizards who are happy to tell everyone how they got it right, but never seem to have thought to mention it when it was happening.
Condi said:
This is the problem, in that markets have been over-valued by most commonly used metrics for a while, but as long as the Fed, BoE and other central banks keep printing money then all historical logic goes out the window.
I agree, diversification is king.And then have a play. Chances are a play with 10% nets you gains and losses in equal measure, assuming you have average luck, sans trading spreads... so no problem.
The issue is probably using your head thinking you see patterns or know enough to know what will happen.
Using your gut is at least self-forgiveable.
My gut says we’re at ATH, people rotating out of one asset class to another, and now somehow people are coming back into tech... despite rotating out not long ago... but this time it’s “observability” being the hot thing
Peak IPO. Lots of things saying end of bull market, not start of a new one.
Then you have lockdown inflicted distortions.
Then all these retail pump and dumpers causing shocks which seem to have systemic linkage.
Index values concentrated in unicorns.
Now even tether crypto seemingly generating systemic risks.
And now central banks are tightening.
It’s all ripe for a black swan, or a ‘no one saw this coming’ correction.
All that said, I would stick with long-invested money. No point selling.
I’d not be dumping in a lump sum now though.
Lump sum BTFD, and cost average the ATH
Edited by Mr Whippy on Saturday 17th July 10:00
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hstewie said:
hstewie said:MikeKite said:
I'm not sure why you are referencing Terry Smith as an example?
Well known successful fund manager says he can't time the market.What hope for bmwmike or the rest of us?
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