Last week saw the worst dips on the Australian sharemarket since November 2008. We’re experiencing an amazing period of volatility and uncertainty, so here I’ll give you an update on an article I wrote back in May 2010 on how to make profits in a tumbling market.
During last week the market was down more than 20% from the peak in April 2011. Yet balance sheets of corporations were in good shape. So what has been driving the markets? The balance sheets of the biggest economies in the world. That’s what the market is worried about. US, Eurozone, Japan all have massive debt burdens.
What this will mean is slow growth from the three largest economies in the world for years to come.
I would suggest that you don’t buy until you see the major market indices in a medium-term uptrend.
Keep in mind that bear markets can last between two and four years and in some cases even longer. For example, through the US recession in 2000-2002, the S&P 500 lost 43%. And more recently though the Global Financial Crisis (GFC) in 2008-2009, the Australian market lost 51%.
As we’ve seen in the last few days, the market will not move down in a straight line. So it’s no wonder that investors are confused by this week’s remarkable volatility — is the ‘recovery’ over the last few days a short-term rally or are we still on a longer-term downtrend?
Keep in mind that even during the middle of the GFC there were market rallies of 20%. But overall from the peak to the very bottom, the market lost more than 50%.
The key message here is, don’t jump in too early. There’s no rush. Don’t be sucked in by bear market rallies.
If you think that the volatility in market will last for a few years, hybrid securities may be a product to consider.
Hybrid securities act like fixed interest payments, offering regular fixed income to investors. At a predetermined date, investors have the option to convert to ordinary shares. This means that hybrid securities act like fixed interest for the first (usually) five years before transforming into fully franked shares.
You can find out more about hybrid debt securities by logging into your Bell Direct account and choosing Quotes & news > Interest rate securities.
There’s also find more information on the ASX website about convertible notes and hybrid securites.
If the idea of investing for the long-term doesn't grab you, then how about something for the fast and furious trader?
If you are willing to take some risk and do some investigative work, you can take short positions on the Australian market through mini shorts (or put warrants).
E-minis are an alternative to contracts for difference (CFDs) and other forms of leveraged share trading.
Taking a leveraged position in a falling market can be a more efficient use of your trading dollars because you only have to allocate a small proportion of the total value of your position to secure a trade, while maintaining full exposure to the market.
If the market goes in your direction, you would make money. Remember, you are taking a leveraged or geared position with these warrants which means if the warrant goes your way, you are looking at inflated gains but if it goes against you, it means inflated losses.
First you'll need to sign a Warrant Agreement Form before you trade warrants.
Just go to Quotes & news > Warrants
You'll also need to read Warrants — Understanding trading and investment warrants
Once you’ve made your decision on which warrant to trade (eg the RBS mini put on the ASX 200 has the code XJOVRR, click the ’Buy' button and off you go.
If you want a low-risk investment strategy, you can't get less risk than cash. The cash rate in Australia is currently 4.75%. If you are locking your money away for six months or more, you may want to consider a term deposit.
Negotiating a falling market
A bear market is one that can be one of the most challenging to negotiate. But with trading and investing tools that can help you get an edge or profit in a falling market, you no longer have to look down the barrel of just losses.
Happy trading!
Julia Lee Equities Analyst