Can you profit from a falling market?
Wellgood
Posts: 86 Forumite
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
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
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Comments
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Short selling or inverse funds. Not sure how accessible they are for a retail investor though.0
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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.0
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I'm not a fan but maybe look at absolute return funds?0
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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.
Alex0 -
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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?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)
- 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.0 -
You can hedge using a CFD short on the FTSE100.0
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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.
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.0 -
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.0 -
How many people listened to the experts and shorted the market in early 2016 and lost their shirts.0
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