If anticipating forthcoming corrections seems impossible, what are the alternatives for investors?

Every time there’s any event that could affect the market, as the recent Yuan devaluation or the Greek crisis, experts begin to fill the news with pages of articles that attempt to anticipate possible future consequences.

After the last financial crisis, we’ve learned that anything could happen in markets: no one could have predicted the crisis or the high volatility, not even the experts imagined what really occurred. There’s no doubt that we’ll have to face market panic situations in the future, however, we think there’s no point in trying to predict market’s ups and downs. The truth is that all big crises have come after unpredictable events. Although this is the way it goes, many experts still waste tons of ink (or bits, now that we are in the digital era) to try anticipating the final outcome.

tumblr_nohkb8sMdC1slhhf0o1_1280

Does it mean there’s no way an investor can protect him or herself?

In previous articles we already mentioned it’s important to have a plan and stick to it with discipline.  Here are some tips from professional investors that can help us to “weather a storm”.

Cash:

Investors do not agree on whether a portfolio should be 100% invested or not. A group of investors believe that investing all the cash means to miss out on the opportunity to get a 10% average return of the S & P 500. On the contrary, there are investors that think this is a way to protect themselves from market fluctuations and to take advantage of market’s falls in order to buy cheaper. Investors with this opinion tend to have 10% in cash and sometimes this percentage rises up to 15% or 20% when there is market euphoria.

One complementary or alternative strategy would be to operate with…

Margins:

Experienced investors with significant portfolios often work with margins. This means operating with the chance that brokers give professionals to leverage by using their own portfolio as a guarantee. In this way, investors are capable of leveraging more or less depending on the market situation. Therefore, in times of falls investors have the possibility to temporarily strengthen their portfolio. However, this only makes sense when there are low interests and the prospect is that it will continue to stay like that.

This strategy is reserved exclusively to experienced investors who are constantly checking their positions. Under no circumstance do we recommend to go past a 1.2 leverage ratio. Moreover, it is advisable to return as soon as possible to a portfolio’s balanced position.


199H
Coverage:

As long term investors, we rarely sell our winning companies and generate benefits to pay taxes. There is a solution for this, which consists in partially covering our portfolios on a global level, not one by one but a certain part of our portfolio. To do this efficiently we could use options from the index we are exposed to and create a general coverage: a 10% to 15% is a reasonable coverage if we have the chance to increase this percentage when the situation deteriorates.  There are strategies with options that allow this coverage with 0 costs or insignificant costs. It would be like buying a life insurance for free. This approach is also for advanced investors. In fact, it’s not difficult to learn at all, once you’ve begun to understand how to smartly use options.

Investment frequency:

Another alternative is to vary the amount we invest or our frequency of investments according to the market situation. This is what investors try when market falls by accelerating their prearranged plan.

But… hold on a minute! Didn’t we just say it’s impossible to predict the market? Almost all the strategies we’ve mentioned in this article are based on the ability to anticipate how the market will move! If we think about it, these strategies, some more than others, involve a correct interpretation of what is happening.  Even so, all of them are definitive or accommodative measures, in other words, they are complementary to our long-term horizon.

Inbestme tries to apply those strategies that depend less on the “art” to guess the impossible. Therefore, we insist on the idea we mentioned at the beginning of this article: follow your plan and learn to control your emotions! For this purpose, it is essential to know what the investor’s priorities are.

However, taking into account the description of alternative strategies and looking back at our beginning as investors who invested in companies; we now explain a multifaceted strategy that we dare to call the 5Ps (we once applied it without knowing it and it obtained good results):

SONY DSC

The 5Ps (in Spanish)

  • Soon, slowly and patiently (3Ps at once)

It is very important to start as soon as possible. However, there’s no rush to build the portfolio as this can be done gradually. There’s no need to invest all of the money and all at one time. Patience is our great ally.

  • Small

Our advice is to stay away from trendy companies that quickly get market favours and high assessments. Our recommendation is to invest when we discover these companies (they remain overvalued for a long time, hello Amazon). We can start with a small investment and then wait for corrections to increase our position with more reasonable ratings / prices.

  • Insight

On the other hand, we can’t lose market opportunities. There are times when big companies or sectors fall from the investor’s favour. Bad quarterly results often give us huge opportunities to enter the market with advantageous prices.

Starters should find their own strategy, one that makes them feel comfortable with the risks they will assume: 5Ps can help at the beginning but the best way to start is by keeping it simple. This is the best advice we can give. We agree with Warren Buffet’s words: “”In 10 or 20 or 30 years, I think stocks will be a lot higher than they are now.” This is the reason why neither Warren Buffett nor we pretend to foresee what the market will do. However, we keep (just like him) our keen insight (if only we had his!)

If you want to make your first steps in the world of investments, our diversified portfolios are an excellent way to begin because they have been designed to have a high diversification which helps weather any market situation.

If you want to make your first steps in the world of investments, our diversified portfolios are an excellent way to begin because they have been designed to have a high diversification which helps weather any market situation.

Know your investment profile and start to invest with us as soon as possible. Time is the best ally for disciplined investors. Inbestme combines optimal portfolios with ETFs from different asset types and markets. You can now become a successful investor with only 10,000 €. Conversely, if you already have some experience and wish to start building your own portfolio Pyramid, our customized portfolios are the best alternative.

Under no circumstances, the content of this article should be considered an offer or a recommendation to buy or sell a financial asset.  Our financial services are only available for investors that become Inbestme’s clients, after accepting the terms and conditions (we strongly suggest our clients to read them carefully) stated on our website. Past performance is no guarantee of future returns. Any historical projection of expected or projected returns might not match reality. All investments are subject to risk and might involve losses, especially in the short term. In the long run, market usually rewards patient investors. Disclaimer.

Risk from another point of view

Volatility and risk are not necessarily the same

Commissions can destroy your rate of return

Commissions lower the return potential of a portfolio

Become an investor

The secret of investing is, finally, that there is no secret

Comments are closed.