Page 12 - DIY Magazine March 2018

EVOLUTION OF AN INVESTOR: WHEELIE DEALER ON HIS ‘OBSESSION’ WITH SHORT INDEX TRADES AND HIS DETERMINATION TO ‘CUT OUT THE NOISE’
Time just whizzes by – more than 6 months ago I did an interview with DIY Investor and this is the first time I have got around to a follow up to inform readers of my progress.
2017 turned out to be a pretty decent year for me although split into three parts - a very strong start until April, a flat and tedious middle part of the year and then a final flurry which boosted my trading ISA to a return of a smidge under 20% for the year.
Considering the fairly low level of risk I take, and the low level of actual buying and selling that I do, I really can’t complain at this result – I target 10% return each year, but have a peaceful life where I sleep soundly and I clearly did very well against this.
If you go to my blog page and look under ‘Scores on
the Doors’ you should be able to find a comprehensive breakdown of the returns on my various portfolios etc. The strength at the tail end of 2017 carried me into the first week of 2018 when I was up hugely (the best start I have ever had to a year), but of course there was no way that could last; the market has a very perverse sense of humour and always gives us a kick up the butt when we think things are looking good!
After that high, my portfolio continued to slide through the remainder of January and then really hit me hard in February - apart from one particularly nasty week it was ‘death by a thousand cuts’. I find these the worst conditions - I would rather have a severe and sharp drop and get it over with than a constant drip of losses playing havoc with my psychology.
For years I have been obsessed with the idea of using spread bet shorts on major indexes to ‘hedge’ my long portfolio of stocks and make money in falling markets are falling (it is possible to use a ETF like XUKS to short the FTSE100 - you buy and sell it like a normal stock
ONE OF THE MOST BASIC (BUT HARD TO AVOID) ERRORS THAT MOST PEOPLE MAKE IS TO BUY AND SELL TOO OFTEN’
but you gain if the index falls and lose if it rises - a
bit weird!). I have had patchy success at and when I screwed it up totally in 2016 it taught me an important lesson about position sizing and strict discipline, with tight stop losses an essential part of an overall ‘system’.
This led me to refine an improved approach to my
index trades; I no longer refer to it as ‘hedging’ per se because I now take smaller positions and go short when markets start to fall and then go long in a small way when they bounce - this worked really well during the February rout.
I will produce a blog post on my website in the next few weeks to explain my new method in detail.
It is relatively simple to reduce ‘stock-specific’ risk by using quality stocks and by good diversification across a variety of factors such as market cap size, strategy (income, growth, recovery, undervalued, defensive, momentum etc.), sector, etc.
I then combine this approach with some simple ‘trading tricks’ like scaling-in to positions in chunks and top- slicing when appropriate if a stock goes well for me.
I suspect the vast majority of investors do something like this but I think very few people actually have a decent method to help reduce or control ‘market risk’ - the approach many take is to just cross their fingers and clench their teeth!
My method of shorting an index means I make money as the market falls and this offsets to some extent the hit I am taking on my long portfolio of stocks - it also has an unexpected benefit that I find it keeps my psychology much more under control and I stay calmer and more rational - exactly the kind of state of mind we need to be in if we are going to make good decisions and maximise profits.
Keeping a cool head in this way means I can focus on trying to figure out when the markets are bottoming and I can then close my short position, bank the profit and then open a new long position on an index to catch the upswing (the move up off the bottom after a pullback is always a period of very fast gains).
DIY Investor Magazine | Mar 2018 12