Warren Buffett is the buy-and-hold advocate but his era is long gone. Do not get me wrong, he makes a lot of money. But as a new investor, looking for buy-and-hold opportunities can be quite daunting – especially in these economic times - when uncertainty seems to be the only certainty.
The credit purge is again wiping out the minute gains made by most stock market indices, but those who invested in funds during the dotcom bubble are no better off than those who are starting now! And they have been paying fees to the fund manager for 15 years on a “diversified” portfolio that has had no significant gain and currently sits at 17% down!
If you are a buy-and-hold investor, it might be time to reconsider your strategy. Maybe open your portfolio to alternative methods of investment. By allocating some of your portfolio to more active investment, you are able to hedge against the downturns of the market. You are also more in control of your finances. Using options can be quite useful to profit from downside movement, but you can also look to short the market when it’s down. Loyalty does not exist in the markets.
If you run a business that is heavily dependent on fuel, you need to buy fuel often, regardless of what prices are! You are therefore at a disadvantage. One way to overcome this is to go long or short in crude futures at decent levels. Futures contracts and options, like the names imply, give you the option, but not the obligation, to buy or sell an investment vehicle at a certain price in the future. If an option expires, you do lose the premium paid to have that option.
Imagine you run an airline. Hedging against rising aviation fuel costs is an effective way to stay in business! You can buy Crude Futures at decent levels despite the fact that fuel prices are high. The fact that you have to buy fuel regularly means you can’t physically buy low. However, buying Crude Futures means you can offset those losses from the gains in your Futures position!
Do you invest in the FTSE? Maybe short the market at a decent level (with good risk management in place) to benefit from a hope-filled rally into those levels in the near future!
Of course, this is all idealistic and requires a lot more hard graft than the typical buy-and-hold investor is looking for, but it does offer a way to benefit from volatile markets.
FTSE100? FTSE250? FTSE350?
If however, you still want to be a buy-and-hold investor, you obviously have a lot of faith in the U.K. economy. You might want to consider investing in the FTSE 250 rather than the FTSE 100. The reason is that the FTSE 100 consists of companies that are heavily dependent on global markets. It therefore isn’t a true representation of the state of the U.K. economy. A booming U.K. market can be better represented in the FTSE 250 which is an index of the 101st to 350th largest companies in the U.K. (by market capitalisation). The FTSE 100 is an index of the top 100. Or maybe try the FTSE 350 (not very popular in the trading world) which combines the two!
Remember: As an investor, you are exactly the same as everyone else out there – unless you have an edge. Hedging gives you that edge. No pun intended.