The Favourite Myth of the Financial Industry

Be Mindful of Investment Banks and Broker Upgrades on Stocks

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The last three months in the market…

The last three months have been unusual in the market. (OK. All of 2020 has been unusual.)

I’m referring specifically to the action in the ASX 200 Index.

I should say ‘inaction’.

Because it refuses to form a definite trend either way. One day it’s up. Then down. Then up. And on it goes to…nowhere.

I have a mate who trades options on the futures contract for the ASX 200 called the SPI.

We call him Mr Spi.

Mr Spi made a motza when the market collapsed in March. I’m talking a return in the range of 2,000%.

But the going has not been easy since for option traders. They thrive on direction and volatility. Choppy, sideways markets are a nightmare.

Trading is a tough gig

Trading is a tough gig. One strategy will work for a time…then it won’t.

That’s why I think having a range of strategies at your disposal is a good idea.

For example, people tend to be put off by the perceived complexity of options.

And yes, they and the different possible strategies can be complex. But they don’t have to be.

The basic dynamic is pretty simple. If you think the index (or stock) is going up, you buy a call option. If you think it’s going down, you buy a put.

Then you factor in the premium, potential pay off and time range.

I don’t do a lot of option trades. But I do have an account and make an effort to keep learning here. It’s important to fully understand how options operate before trading them.

Right now, trading in some small-caps are delivering excellent returns. But small-caps can be risky. I remember 2018 well. That year small-caps were flat.

It was a very difficult market to get consistent winners in because even good developments weren’t equating to price appreciation. It was as if buyers took a holiday.

Perhaps a dynamic like that returns someday.

Sometimes it’s easier to leave a sector behind and try something different.

It doesn’t have to be options.

You could consider using a touch of leverage with CFDs. That can turn smaller moves — percentage wise — into more powerful returns (and losses, of course). But CFDs are not for everyone. They carry a larger degree of risk which you should fully understand before considering them.

Some traders trade commodity futures or foreign exchange. That’s not something I’ve got to yet.

The danger with broadening your strategies like this is you lose whatever edge you had in your previous market. You go back to being a beginner.

That means you need to start small again, so your early setbacks or mistakes don’t burn you too much.

But I do think having a range of tools at your disposals is important. And of course, you should always ensure that you fully understand the various trading strategies, including their associated risks before meddling in them.

The financial industry likes to sell the ‘set and forget’ mantra of holding a passive index fund.

That suits them — they collect fees either way.

But, as above, the index is grinding along right now doing precisely nothing.

I don’t see it taking off anytime soon, do you?

I had an old friend contact me the other month. He had some money he wanted to invest for his young sons.

He had the idea to buy a cheap index ETF.

I told him I wasn’t sure it was worth the risk. The upside didn’t seem compelling, but a downward move was entirely possible.

My take is you have to be active.

There are lots of tradeable moves happening at the moment. It’s important to make the most of them now because the market may not stay that way.

Who knows what tomorrow brings?

Not me.

Perhaps you don’t want to be an active investor/trader.

Then the solution might be to consider an active fund manager.

Yes — they tend to get a bad rap these days. They can make mistakes.

Sometimes they don’t ‘beat’ the market.

But my view is the Aussie index is full of mediocrity.

The idea of leaving large slabs on money in it and expecting a great return is rather strange.

Handing your money to a specialist can deliver alpha.

One idea right now is exploiting the bull market in gold.

Best wishes,

Callum Newman Signature

Callum Newman,
Editor, Profit Watch