Folio Management | I Read The News Today Oh Boy! 13-Oct-2017 - Correction Strategy

13th Oct '17 by matylda

28 comments 6162 reads

Morning All!

It's a first! Couldn't find anything to report on this morning.

So, how about a question...

What's your Correction Strategy - How much of your portfolio is in Cash right now and what's your strategy for a correction?

I'm about 25% in Cash and have a small initial rolling Spread Bet Short position on the FTSE from 7550 - Intending to ramp it up on a fall to cover £5,000 for every £100,000 in my Portfolio should we see 6,800 (about a 10% correction). Current Stop is at 7580 at which stage I will rethink my approach - But for sure I will have some form of insurance.

Look forward to any others position and approach.

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About the Author

Matylda

Premium Member

28 comments

peterg

13th Oct '17

I'm just under 5% cash at the moment. A little lower than I normally aim for. In general I don't try and time the markets, I aim to be fairly fully invested all the time. But I like to have around 10% in cash so I have funds available when I spot something interesting.

Peter

DMG2305

13th Oct '17

I am 95% invested. I invest my pension so have a 20 year timeframe. I've never shorted and wouldn't feel confident doing so. My portfolio comprises 25 shares and has a c. 4% yield. I'm overweight on shares I think might outperform over the next 5 years mainly XPP and APGN at the moment. I recycle my smaller holdings into my conviction shares rather than hold cash but can usually buy something or add to positions with my monthly contribution. Currently trying to build a smaller position in Filta Group too. I hope to reduce down the number of shares I hold over time. Returns ytd c.17%

Brilliant Leader

13th Oct '17

Currently 13% cash and 2% hedge (with 2x leverage). I am experimenting with using the volatility index as a hedge. This tends to have an inverse correlation with the S&P500. As I don't have any S&P500 holdings, it is clearly an imperfect hedge but as most of my holdings have significant US exposure, my greatest concern is the US catching a cold, so to speak.

vik2001

13th Oct '17

shorting the ftse using suk2 or using a ETD can often lead to losses and wont always protect you, this article explains why:
http://monevator.com/short-etf-maths/

Tortoise investor

13th Oct '17

I am about 60% cash. However, part of the reason is that I can't seem to find anything worth investing in. I've also made about 25% this year which I am content with so happy to wait around a bit.

I've been experimenting with a short spreadbet on FTSE250 via a fantasy portfolio to get adjusted to shorting. However, I noticed that I have so far lost money on it (around 3% probably) due to daily interest costs - I assume that's pretty normal? That seems to imply to me that the only way to really make money on an indice short is to time it v well. I know v little about shorting via spreadbets so need to learn more. Any recommendations for reading are welcome.

Wol

13th Oct '17

A very good question. I have been selling / reducing my holdings over the last few months just in case. And there are plenty of problems looming that could turn require a just in case. I am about 20% cash at the moment with my finger on the sell button.
The other interesting question is how quickly or accurately we could recognise and respond to a crash. I am not too worried about corrections as, well, that is what they are - corrections, usually followed by another up leg. But a proper bear market could hit small cap growth stocks quite hard. So I would be interested in any ideas on how we could recognise a crash early enough to bail out. I remember reading that one of Leon Boros's major successes was dodging the credit crunch - selling everything and buying back when the worst had happened.
Having had a look at the charts it seems that some crashes happen in slow motion, giving plenty of time to bail out at a small loss (or reduced profit if we have been doing well). Others hit almost instantly. I imagine the stock market would react really quickly to a Trump / Kim confrontation with threats from Kim to bomb South Korea and Japan.
So maybe it is time to take another 10% off the table. I used Covered Warrants to short the market during the credit crunch but did not find this worked very well because I couldn't time the market well enough and often found my shorts coincided with temporary recoveries. So this time I think I will just sell my holdings.
Thanks again for a fascinating question.

matylda

13th Oct '17

Agreed there re SUK2 or higher even!

Thanks all for sharing, interesting to see the general view of 10% or less in Cash with the long term time frame in mind.

I will add that the 5% insurance per £100k costs me just 0.1% a time to initiate - So for me if I try 10 times and all fail, my portfolio will still in theory be up much more than the 1% per £100k it costs me.

I know it's only cover for 5% for a 10% correction but if it does eventually happen - What it does is allow me to easily fund the ISA subscription next year from the proceeds.

Hope that makes sense and thanks all for sharing.

Brilliant Leader

13th Oct '17

And thanks for asking the question matylda, it is interesting to see how others are viewing and playing the current market.

aflash

13th Oct '17

Careful!

See this discussion

https://www.stockopedia.com/content/plans-for-an-eventual-bear-market-219508/?comment=48#48

of UVXY.

It appears to be what you are buying although you do not name it.

As a result of the thread I changed a limit order from 17,77$ to 21$ to allow a purchase to go through.

Guess what? A month later it has reached my limit price of 17,77$

My point is that this bull market has taken a long time to form and looks like it will take a long time to unwind.

There are short term shocks on profit warnings of individual stocks. PFG to cite one in the news today. RDSB in 2015 after the oil price fall and the BG offer. HSBC a year or so ago.

Then there are short term shocks on political events such as Brexit which is the best hope for the fear index. North Korea? Trump impeachment?

However the US indices are bullish until proven otherwise.

You have reminded me I was going to short the US small cap index because it had risen so sharply there would be profit taking. Guess what? A week or so later it is just flat.

Many people lost money trying to time the top of the Tech market in 2000 and it looks like history is repeating itself.

Once it turns then I shall try and avoid buying the dips, maybe.

HumourMe

13th Oct '17

~95% invested, all with trailing stops. When the party is over, each will trigger and I'll find few new things to buy.

I've found in the past that anticipating events is detrimental to my returns. When I take a position based on macro events I am almost always wrong in the impact it'll have on the market (and in turn on individual shares). So now I don't do that.

After I'm out I'll most likely wait until bases start appearing before buying again on new highs.

I've recently been re-reading CANSLIM and Minervini, especially the chapters on both selling and holding and they stress a systematic approach to letting the price do the talking. I need to re-examine the chapter 'M' of canslim to see just what I should look for.

Brilliant Leader

13th Oct '17

You are correct aflash, I am using £uvxy following the discussion you refer to. I had been tracking the VIX for quite some time as a possible earlier indicator of trouble, so decided the product was worth experimenting with. My purchase at $19.86 is well out of the money but then, my portfolio has risen much more than my £uvxy (in £ terms) during the 2 weeks I have held the position. I am aware of the risk and treating this as an experiment.

For what it is worth, I don't think the market is at the euphoric stage and therefore, I don't fear a complete meltdown. However, I do think a correction might occur before the market moves forward again. But in my view, now is the time to learn and prepare for choppier waters. From a cash perspective, I am also waiting for the market to tell me it's direction and which type of strategy it will likely favour before I go on a buying spree. I am tracking holdings and watch lists across quality (but quite expensive) growth shares, small cap value, pension deficit plays, large cap HYPs and some niche ETFs. I am also taking a long hard look at my overall portfolio mix with the aid of Stockopedia's portfolio tools.

Cheers
Simon

vik2001

13th Oct '17

heres my strategy:

I only buy UK shares, and to cover the rest of the world I buy funds so im diversified in my portofilio across regions:
1x European fund
1x Emerging markets fund
2x Global Equity funds (bigger weighting in UK, US and Japan). 1 of the funds is large cap global, and the other is smaller caps global.

The funds I top up every month, regardless of market conditions. They help keep me diversified and have delivered good gains. If anything they also help balance my portfolio.
The only shares I buy are UK shares, which are my conviction holds. They are normally more weighted than my funds.

I try to maintain 15-20% in cash at all times, ready for any opportunities. Im also avoiding shorting, as that’s not brought me much luck, and been burnt a few times. However if we in a global downturn where everything is down due to a disaster, I may heavily short a ETF for a 3-4 days max and get out.

Im looking to invest for a further 20 years, so unless we have a massive meltdown I intend to be invested mostly. Corrections don't worry me as we will always recover from it, and is normally a excuse for me to top my funds up with a little extra and get rewarded later down the line.

hayashi22

13th Oct '17

If its not being too nosy which European fund and which Emerging markets fund are you in? Thanks

vik2001

13th Oct '17

Schroder European Alpha Acc (L)
UBS Global EM Acc
For the global I use Lindsell Train Global, and Standard Life Smaller Cos Global.

I review each fund every 6th months, and may replace with another if I feel the need.

No Uk based funds, as I just buy individual shares, no more than 8 UK shares usually in my portfolio. I use Stockopedia to help in my share selection, its the only source I use to select shares :)

The above is just works for me, and always DYOR

Mike888

13th Oct '17

Hi paraic84,

I cannot recommend any reading material, but to answer your question, you will be charged interest to hold a daily short position open over night.

In the days when interest rates were high you actually got paid to take a short position overnight, but now with interest rates so low you end up paying. The calculation is usually LIBOR minus the brokers%, so if the broker charges 2.5% and LIBOR rate is 0.5% you will be charged 2%\365 per day (0.5%-2.5%= minus 2%). If interest rates were 5% your broker would pay you 2.5%\365 per day (5%-2.5%=plus 2.5%). Check with your broker as it may not be like this for all brokers.

Be very careful shorting via spread bets, in theory your exposure is limitless and can exceed your deposit, so always consider a guaranteed stop. If your broker doesn't offer a guaranteed stop I'd recommend looking for another broker. A normal stop loss will not guarantee taking you out of the market at the price you want.

My general advice is to be very careful with spread bets (or CFD's), they can be very dangerous indeed..

Mike888

13th Oct '17

Just a quick note, as I feel there may be some confusion on what hedging means, hedging a portfolio isn't an attempt to time the markets its actually quite the opposite. It's a method to provide insurance against unforeseen events, or when you consider risk on your portfolio may be increasing.

As with all insurance policies there is a cost to do this and there should be an acceptance that it may be money wasted, as it is with home or car insurance if you are lucky enough not to need to make a claim. Its advantage is that it has the ability to limit your losses but in doing so it obviously limits your gains. It can however magnify gains after a market fall, as your payout can be used to buy depressed stocks.

hayashi22

13th Oct '17

Thanks VIK. Will give some serious thought to that over w/e.
My UK holdings are all single company stocks but I'm looking for overseas diversification. Way too risky for me to speculate on overseas stocks.

Tortoise investor

16th Oct '17

Thank you - v helpful

simoan

16th Oct '17

I am about 60% cash. However, part of the reason is that I can't seem to find anything worth investing in. I've also made about 25% this year which I am content with so happy to wait around a bit.

Does the 25% include the cash? Or have you recently sold down 60% of your holdings? If so, that's an excellent performance YTD including the cash. If not, I find it's really important to include the cash in calculating your returns because it's vital to illustrate to yourself what a drag holding cash is having on overall performance.

Like you I've more cash than I would like (35%) due to lack of good value ideas and current holdings looking too toppy to top up. I never ever hedge - don't see the point and just know I would lose money and reduce performance, if I tried.

However, the best approach will differ on your individual circumstances. I'm still in full-time employment which generates good cashflow for investment and it is my main source of income. If I was retired and living off my investments my approach would necessarily be quite different.

All the best, Si

Tortoise investor

16th Oct '17

Yes the 25% includes cash - thanks. Investable cash anyway; I have other cash that I need to keep aside. I've only really had one duster this year (£BLTG) and pretty much everything else has made a profit including two shares over 100% (IQE (LON:IQE) and £PURP). That said last year I did very badly in November and December so I'm not counting my chickens just yet!

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I Read The News Today Oh Boy! 13-Oct-2017 - Correction Strategy

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About the Author

Matylda

28 comments

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