Smarter investing - hedging

badger09

Need some help to spam bomb stockpeg :eek:

Yorkie1

pamistocks is about the 6th username for the same spammer. Please click the spam button.

fiesta04

SPAM SPAM SPAM !!!

Must pull out some old Monty Python with all this spam about.

F4

Yorkie1

Now the spammer's name is indexbio; please click spam.

robatwork

Do they search for the word hedge and spam those threads? Are they the same in the gardening forum?

robatwork

OK so I have done plenty of researching and concluded that, for me, it comes down to this line extracted from the midst of one of bowlhead's typically fulsome and interesting replies:

bowlhead99 wrote: »

So, there is no such thing as a low cost hedge fund, nor a low cost hedge fund-of-funds.

As a non-high worth investor, I am not prepared to see my small investments eroded by anything other than minimal fees. So what I have decided to do is "hedge" myself by going for other dampeners - bonds (probably gilts) and possibly a punt on commodities but realising the latter will probably fluctuate a lot more than the rest of my portfolio.

I won't be rushing into anything. Expect some dumb questions about bonds once I have ploughed through some of these website and books....

bowlhead99

Traditionally, bonds go up when equities go down and vice versa. The last couple of years have been a bit unusual as both have gone up together, with all the governments printing money and buying bonds, which drives the gilts and safe bond prices up - and yields down- and everyone then looks to equities and high yield bonds for their return because there is relatively limited return available in safe bonds.

Then in the last couple of weeks equities and bonds have fallen together as the threat of the end of QE hurts both of them.

So it's a bit of a funny situation and you will need to be careful which particular bonds or gilts you're buying. Gilts have got a little cheaper in the last few weeks (so that 10-year gilts were yielding 2.4 something % this week from under 2% about three weeks ago), but you can of course get 2% on cash savings for a 1-year fix or only a little bit less for instant access. With cash in a decent savings account or even a high paying current account, there's no risk of capital loss. With gilts at current high prices, there is a very real risk of loss of capital.

Clearly with gilts the potential downside is not so significant as with equities and so you can still call them a "dampener", and the prices are now at least a little lower than they were in recent memory, but the long term upside would still seem to be extremely limited compared to equities - just like cash. For that reason, unless your money is already in S&S ISAs or pensions, where you can't just walk into a bank and grab a nice easy cash (or cash ISA) rate, I would caution against buying lots of gilts or similar, even if a book tells you it's a standard part of any sensible portfolio.

You may draw similar conclusions yourself once you've looked into it. Or maybe not. But I suppose another reason to be particularly careful about leaping into gilts/bonds is your personal investment style, where you're looking for the absolute bare minimum costs. If you just buy the cheapest general gilts tracker you can find, you are destined to lose a chunk of your capital, because gilts can't stay at these prices when money printing stops and/or interest rates go up. It's not that you won't preserve more capital than if you were all in equities - you might well achieve a dampening effect - but you'll probably lose more than if in cash, without much potential upside to make the risk worth taking.

By contrast a strategic bond fund where people with more experience than you or I are watching the markets and moving your money between different classes of bonds, to deliver a return and earn their fee, would hopefully have a chance of dodging the worst of an inevitable correction. The fees would be higher but might be worth considering. Same goes for hedge funds but I accept they are not for everyone.

Even though I hold some equity trackers, I'm generally not anti-fees, as I look at the after-fee return and in a lot of asset classes it seems you are not really throwing away your money by paying fees.

Ark_Welder

robatwork wrote: »

I won't be rushing into anything. Expect some dumb questions about bonds once I have ploughed through some of these website and books....

I have posted this link to PIMCO's site before, but it won't hurt to do so again. It should give you an idea of the different types of bonds that there are and how they should act in different economic circumstances.

There was also this bit of fluff from a while ago that might be of interest.

All the time remembering that cash is a great dampener for most other asset types. And whilst it can lose out to inflation, so can most other asset types, and those other asset types can also lose value in nominal terms. Exceptions being NS&I index-linked savings certificates (when available); and index-linked bonds (including gilts) that are bought at, or below, par value being another.