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  • FIRST POST
    • Wellgood
    • By Wellgood 1st Oct 17, 6:28 PM
    • 71Posts
    • 8Thanks
    Wellgood
    Can you profit from a falling market?
    • #1
    • 1st Oct 17, 6:28 PM
    Can you profit from a falling market? 1st Oct 17 at 6:28 PM
    Assuming you just hold 100% equities then in my mind when the market is rising than your portfolio value increases as share prices go up and when the market is falling your portfolio value goes down as share prices fall

    But what if you thought market was going to go down . Is there anyway an individual can buy a product that let's you take advantage of the market fall? After all we know the market has ups and downs so it is inevitable it will go down at some stage . Does a downward swing always have to mean a hurt?

    I guess alot of people will say to diversify to reduce the risk/ hurt and don't try and time the market,etc which I fully agree with but for the purposes of my question let's just assume I'm only talking about equities and we have a global recession that affects all share markets negatively so all share markets/ indices go down.What options are there to take advantage of this (rather than just minimise the downside)
    This is just a theoretical question btw
    Thanks for any perspective / thoughts on this
Page 1
    • ruperts
    • By ruperts 1st Oct 17, 6:32 PM
    • 677 Posts
    • 1,116 Thanks
    ruperts
    • #2
    • 1st Oct 17, 6:32 PM
    • #2
    • 1st Oct 17, 6:32 PM
    Short selling or inverse funds. Not sure how accessible they are for a retail investor though.
    • Thrugelmir
    • By Thrugelmir 1st Oct 17, 6:47 PM
    • 56,183 Posts
    • 49,569 Thanks
    Thrugelmir
    • #3
    • 1st Oct 17, 6:47 PM
    • #3
    • 1st Oct 17, 6:47 PM
    You can always use stop losses on your holdings, i.e. put trades into place to sell should a certain price be reached. Though share prices can and do gyrate very quickly up and down. If you are investing for the long term. Then staying invested while adding new money and reinvesting dividends is the best policy. Rather than trying to second guess the market. There's an old adage. Time in the market is more important than timing the market.
    “Opportunities come infrequently. When it rains gold, put out the bucket, not the thimble”
    ― Warren Buffett
    • ColdIron
    • By ColdIron 1st Oct 17, 7:08 PM
    • 3,657 Posts
    • 4,401 Thanks
    ColdIron
    • #4
    • 1st Oct 17, 7:08 PM
    • #4
    • 1st Oct 17, 7:08 PM
    I'm not a fan but maybe look at absolute return funds?
    • Alexland
    • By Alexland 1st Oct 17, 7:28 PM
    • 731 Posts
    • 461 Thanks
    Alexland
    • #5
    • 1st Oct 17, 7:28 PM
    • #5
    • 1st Oct 17, 7:28 PM
    Remember that bonds have historically had an inverse relationship to shares so when shares go down 0.5% then bonds tend to go up 0.25% as people move their money to perceived safety however they can both drift in the same direction over time.

    Alternatively you could look at equity hedging - going short on stocks. However given the general direction of the markets is upwards with inflation then consistantly going short would leave you in a worse position than if you had stayed in cash.

    For almost guaranteed gains it's best to try and exercise self control to stop yourself trying to second guess the markets and fall into behavioural traps. Invest for the long term in assets that make sense and filter out the noise that could encourage you to speculate and make losses.

    Investing is all about maintaining perspective.

    Alex
    Last edited by Alexland; 01-10-2017 at 7:32 PM.
    • ChesterDog
    • By ChesterDog 1st Oct 17, 7:29 PM
    • 808 Posts
    • 1,475 Thanks
    ChesterDog
    • #6
    • 1st Oct 17, 7:29 PM
    • #6
    • 1st Oct 17, 7:29 PM
    http://www.investopedia.com/terms/i/inverse-etf.asp
    I am one of the "Dogs of the Index".
    • bowlhead99
    • By bowlhead99 1st Oct 17, 8:07 PM
    • 6,985 Posts
    • 12,575 Thanks
    bowlhead99
    • #7
    • 1st Oct 17, 8:07 PM
    • #7
    • 1st Oct 17, 8:07 PM
    But what if you thought market was going to go down . Is there anyway an individual can buy a product that let's you take advantage of the market fall?
    Originally posted by Wellgood
    let's just assume I'm only talking about equities and we have a global recession that affects all share markets negatively so all share markets/ indices go down.What options are there to take advantage of this (rather than just minimise the downside)
    Two ways a UK retail investor might do this would be:
    - Spreadbets
    You can place a spreadbet on an index value with a spreadbet provider such as IG.com. You bet x pounds (or pence) per point that the index value will be below a certain level on a certain date (e.g. next week, next month, next quarter). If you are right, you get paid out. If you are wrong, you pay them, by that same amount of pence per point. The market is live so you don't have to wait for that date, you can just cash out when your position is more valuable than it was when you started... or when it has gone very wrong (e.g. market has risen strongly rather than fallen, so you have a losing position) and you can't afford more losses.

    Spreadbets can also be done with guaranteed stop-losses or you could use 'options' to limit the amount you can lose. Like other types of gambling winnings, gains/losses are tax free.

    - Exchange-traded funds (ETFs) or exchange traded products (ETPs).
    An example of exchange-traded products you could buy on the stock exchange to profit from downwards movements would be Wisdom Tree's "Boost ETP" series (https://www.wisdomtree.eu/en-gb/etps) ; I have used their 3UKS which delivers approx 3x the daily movement of the FTSE100 but in the opposite direction (short rather than long). They also have a 1x and 2x version.

    Another would be Deutsche Bank's DB-xtracker series (https://etf.deutscheam.com/GBR/ENG/Download/Factsheet/LU0322251520/B2PDKQ3/S-P-500-Inverse-Daily-UCITS-ETF); That particular one provides the inverse daily movement of the US S&P500 and you can buy it on the London stock exchange priced either in USD (ticker code XSPD) or sterling (XSPS); they also have a 2x version (XT2D) delivering 2x the daily (negative) movement of the index.

    Note that exchange traded products are designed to perfectly mirror the inverse movements of a daily market on a percentage basis- but they reset each day and particularly with gearing can end up giving quite different results from the underlying index from which they're derived once you are going across multi-day periods. If the market is choppy (a bit up, a bit down) you can easily lose money over the course of a month without the market actually going up or down in a sustained way, due to the way the returns will compound.

    Unlike spreadbets, buying and selling exchange traded products would be in scope of capital gains taxes (unless you were doing it inside a CGT-free tax wrapper such as a SIPP)

    If you were trying to 'hedge' a holding of actual funds in your portfolio for a while without selling those funds, or just make a long term downwards bet on the market(s), spreadbets would generally be a simpler way to do it than daily ETFs.
    • inflationbuster
    • By inflationbuster 2nd Oct 17, 12:17 PM
    • 127 Posts
    • 28 Thanks
    inflationbuster
    • #8
    • 2nd Oct 17, 12:17 PM
    • #8
    • 2nd Oct 17, 12:17 PM
    You can hedge using a CFD short on the FTSE100.
    • Thrugelmir
    • By Thrugelmir 2nd Oct 17, 12:48 PM
    • 56,183 Posts
    • 49,569 Thanks
    Thrugelmir
    • #9
    • 2nd Oct 17, 12:48 PM
    • #9
    • 2nd Oct 17, 12:48 PM
    Remember that bonds have historically had an inverse relationship to shares so when shares go down 0.5% then bonds tend to go up 0.25% as people move their money to perceived safety however they can both drift in the same direction over time.
    Originally posted by Alexland
    In an era driven by investors chasing yield. Which has driven nominal values above par for fixed interest stocks. A rise in interest rates is likely to hit both asset classes. Historic data used unwisely could be costly.
    “Opportunities come infrequently. When it rains gold, put out the bucket, not the thimble”
    ― Warren Buffett
    • Malthusian
    • By Malthusian 2nd Oct 17, 3:32 PM
    • 3,434 Posts
    • 5,267 Thanks
    Malthusian
    The thing about any investment that can go up when markets are going down - whether shorting, absolute returns or inverse ETFs - is that they can and will go down when markets go up.

    And markets go up more frequently than they go down. Hence why shorting the market is a good way to lose your shirt.

    There is one exception and that is cash. Cash goes up when markets are going down but it doesn't go down if markets go up, so just sell the whole lot until you think it's going to go up again. "But that's timing the market and I don't want to do that" you say. Good, then don't.
    • grandst
    • By grandst 2nd Oct 17, 7:01 PM
    • 36 Posts
    • 22 Thanks
    grandst
    How many people listened to the experts and shorted the market in early 2016 and lost their shirts.
    • greendoor665
    • By greendoor665 2nd Oct 17, 10:10 PM
    • 44 Posts
    • 91 Thanks
    greendoor665
    It's possible to fall from a falling market yes, but the more important question is, can you know in advance when the market is going to fall with enough accuracy so you can place your trades and make money, and the answer to that is probably not.
    • Treesie
    • By Treesie 4th Oct 17, 5:09 PM
    • 51 Posts
    • 8 Thanks
    Treesie
    It's possible to fall from a falling market yes, but the more important question is, can you know in advance when the market is going to fall with enough accuracy so you can place your trades and make money, and the answer to that is probably not.
    Originally posted by greendoor665
    Knowing in advance needs a crystal ball, you trade what you see, not what you think. If you wish to spreadbet if the market is falling make sure you have a guaranteed stop in place, it will cost you a little extra but you will sleep at night. You can register for a dummy account with IG if you want to take a look but don't be tempted to have a 'punt' or try and guess the market .... you will loose.
    • levdon01
    • By levdon01 5th Oct 17, 10:12 PM
    • 7 Posts
    • 1 Thanks
    levdon01
    Profiting from a falling market is possible but my advice would be to diversify and then ignore share price movements. If the market seems to be overheating then reducing your positions in equities is a natural thing to do. I would advise against short selling equities especially in a money-printing environment - the more they print the higher share prices will go which will hurt the bears. The more money that is printed the more distortions that can occur. I have seen many traders and investors call the top of markets only to see indices rise a further 20%. Hence why I have a stock portfolio and ignore its gyrations. I used to try to time buys and sells to maximize profit but found that this had very mixed success and was not really worth the effort and the stress.

    The average person would do better at buying deep dips in stocks that yield a fair dividend and selling if any asset class appears to be in a bubble. Other than that - ignore the noise.
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