Hedging Your Bets and Drip Feed Investment

Hedging Your Bets and Drip Feed Investment.

Many clients will know that we altered our own personal investment position on 9 February 2018  and drip fed some of our funds in across many equity markets to take advantage, we hope, of pound cost averaging, i.e. spreading the average ‘buy in’ price to smooth out market peaks and troughs.  This was because there was a market correction last week of around 10% across many sectors.

The Bank of England hinted at rate rises, so did the Fed and quantitative is gradually being turned off.

What if it falls even further, will you not lose money?  We thought it be helpful for investors to understand how ‘drip feeding’ works.

Let us imagine we have £100,000 cash parked and we drip fed in £50,000 on 09/02/18 when FTSE 100 closed at 7,092.

£50,000 buys 7.05019741 units at 7,092 each.

If FTSE rises back up from 7,092 to say 7,800:   We own 7.05019741 units @ 7,800 = £54,991.53.    We make a profit of £4,991.53. We are happy at just short of 10%.

IF FTSE falls another 10% to say 6,383, we will have lost money on the first £50,000 reinvested but we plan to drip feed in again the remaining £50,000 (cash parked): £50,000 / 6,383 = 7.8333072 units.

We now own 14.8835046 units.

• If FTSE then grows back to just 7,092 (not its full high):  14.8835046 units X 7,092 = £105,553.  We have made a profit of £5,553. That’s 5.5%
• IF FTSE had a huge rally to return 7,800: 14.8835046 units X 7,800 = £116,091.  We have made a profit of £16,091.  That’s 16%.

This is pound cost averaging, drip feeding, hedging your bets and how we invest in a uncertain, potentially falling or rising market.

Why did you not invest after Brexit dip and recovery, where FTSE 100 was at 7,100 in December 2016?

The simple answer is market instability and uncertainty.  We had the Brexit result, Donald Trump had been elected and governments globally were artificially propping up markets with quantitative easing.  We simply did not know when markets would correct, they could have gone at any time.  It is easy in hindsight to say we should have gone in as FTSE 100 grew all through 2017.  Yes, we missed it but equally we have missed the falls in 2018.

Every investor who had growth in 2017 did lose a lot of it in just 3 days last week, if they did not ‘cash park’ in December/January.

Political and Economic Status Quo Returns.

Now we are politically more stable, Trumps tax reforms have been passed, Brexit is shaping up and central bank/government stimuli are being withdrawn.  Markets are ‘returning to the norm’ i.e. companies must now survive on their own merits and trade models without central bank and government stimuli.  It is much easier for us to make judgement calls and invest when we think the time is right or indeed drip feed in, as we are doing.

What should you do?  We can only advise what funds you should be invested in accordance with your risk profile and for normal market conditions.  It is for you to decide whether you fully invest or drip feed or alter your risk profile for the time being.

Like we have always maintained, we cannot call the markets and therefore have decided to ‘hedged our bets’.