To all the maths gurus. I need your help.

wyrleyite

Currently I own a index tracker unit trust, into which I pay £50 a month. I haven't got the exact figures to hand so I will examples. What I intend to do is this:-

I currently have 2500 units at a price of 150p worth £3750. But I have only invested £3300 of my own money meaning I have made a 13.6% profit. Correct?

I intend to sell £450 pounds worth of units ie. my profit (450/150x100=300 units?).

Now, I'm taking a gamble but I think stock markets will fall in value over the next year or two (please don't comment on this, it's just the maths I'm concerned with;) ). So if for example they fall by 10%, ignoring the fact I will continue to pay in each month and taking into account tracking error, the value
of each unit will be 135p.

If I then reinvest my profit of £450 I can buy 333 units at the cheaper price (450/135x100 = 333?).

If they then rise back to their original value I will have 2533 units worth 150p each making an additional profit of 33x150/100 = £49.50 on top of my original profit of 450.

Is the maths behind this sound and is this a good strategy?
Again please no comments on stock market movements just the investment strategy.

turbobob

Assuming you aren't subject to initial charges on buying the units (check this) then I think the maths part of it stands up. I assume by selling units you mean taking the cash out of the ISA? This is fine as you are not near the annual ISA limit, meaning you won't have any problems with re-investing the money.

Another strategy (personally I would prefer to do this) would be to move money around in your ISA, e.g. moving some of it from the UK Index tracker fund to a cautious managed, bond or absolute return type fund. As an example, some of the absolute return funds aim to make money in a falling market by taking short positions on shares. In any case, its not usually a good idea to have all your eggs in one basket.

Initial charges could be up to 6% on some funds, although for an index tracker I would expect it to be much lower than this. I don't know who you are with but if you transferred to a discount broker like Hargreaves Lansdown you could save on any initial charges that you may be paying at the moment, and this would also give you access to the full range of ISA funds from more or less all of the fund providers. You could also go to an IFA if you need advice.

wyrleyite

No there aren't any initial charges and I'd move the money into a high interest web saver until the time is right.

earlgrey_3

You don't seem to have taken into account the interest you'd earn on the £450 while it's out of the fund - assuming it's not going to be kept under the mattress.

But then as the original figures are based on guesswork anyway it doesn't matter much. If the market you're tracking goes down you'll win a bit and if it goes up you'll lose out.

(Edit: posted as you replied.)

cheerfulcat

wyrleyite wrote: »

Is the maths behind this sound and is this a good strategy?
Again please no comments on stock market movements just the investment strategy.

The mathematical calculations themselves are correct. The strategy however is suspect. You're better staying in the market rather than trying to time it.

EDIT - my bad, got the wrong end of the stick. Ignore what I said about the strategy.

wyrleyite

cheerfulcat wrote: »

The mathematical calculations themselves are correct. The strategy however is suspect. You're better staying in the market rather than trying to time it.

I'm not leaving, just withdrawing some cash putting it somewhere safe and then reinvesting it when the price is cheaper.

cloud_dog

cheerfulcat wrote: »

The mathematical calculations themselves are correct. The strategy however is suspect. You're better staying in the market rather than trying to time it.

Its called 'top slicing' and is a very prudent practice with investments as noone knows if things will continue to go up or down.

Normally though the top slicing will happen when you have made significant paper profits, i.e. 50% and above but, as with everything you need to make your own choices and feel comfortable with them.

Often investors will use the profit element as an initial investment elsewhere.

cloud_dog

cheerfulcat

Ah, sorry wyrleyite, I misread your OP - for some reason I thought you were intending to sell the lot. As you are just talking about taking some profits then yes, there's nothing wrong with that at all. Will edit my first post so as not to mislead anyone else.

Milarky

wyrleyite wrote: »

Is the maths behind this sound and is this a good strategy?
Again please no comments on stock market movements just the investment strategy.

The maths is correct I'd say.

As to the strategy, if you believe there's going to be a fall why would you confine yourself to just removing the profit? A relatively safe alternative would be to sell a much larger stake (say 50%) - which gives you a 50% hedge against any fall but then restricts you to only 50% of any rise. But you would then have about £1650 to go with your already committed £50 for the next two years (your chosen time horizon) this would allow you to increase your regular contributions by (say) £50 - to £100 per month and also retain the paper profit of £450 outside your investment meanwhile.

If you assume an average rate of fall of 5% per annum (10% over 2 years) your new units will be @ 95% of the current price - and they represent £1200 worth - about 842 (or +42units on today's prices) +42 units @ 1.35 is then about £56 more value than otherwise compared to the strategy you outlined.

If prices rise - and never fall - of course you suffer relative performance - whilst being better off - of about the same degree (£61) compared to your own strategy

[Just a thought]

dwileflunker

Milarky wrote: »

The maths is correct I'd say.

As to the strategy, if you believe there's going to be a fall why would you confine yourself to just removing the profit? A relatively safe alternative would be to sell a much larger stake (say 50%) - which gives you a 50% hedge against any fall but then restricts you to only 50% of any rise. But you would then have about £1650 to go with your already committed £50 for the next two years (your chosen time horizon) this would allow you to increase your regular contributions by (say) £50 - to £100 per month and also retain the paper profit of £450 outside your investment meanwhile.

If you assume an average rate of fall of 5% per annum (10% over 2 years) your new units will be @ 95% of the current price - and they represent £1200 worth - about 842 (or +42units on today's prices) +42 units @ 1.35 is then about £56 more value than otherwise compared to the strategy you outlined.

If prices rise - and never fall - of course you suffer relative performance - whilst being better off - of about the same degree (£61) compared to your own strategy

[Just a thought]

Well said. Perfect logic, and as accurate as you can get without devine intervention.