Make Money When Markets are High with a Risk of Correction or Fall
Published / Last Updated on 13/09/2024
Following Covid-19, inflation increases, compounded inflation increases due to the energy crisis and Russia’s invasion of Ukraine, higher interest rates and even higher inflation, the subsequent cost of living crisis and now inflation falling and interest rates falling, we have long predicted that stock markets will set year highs and all-time highs in 2024.
Today, Western markets are near their year and all-time highs again, but China/Hong Kong is subdued, some 10%-15% off their year highs. We still have huge geo-political risks with Ukraine, Gaza, North Korea, a risk of US recession as well as China trade tensions on EV Car Exports as well as the China/Taiwan question.
We all know the basic principle of “buy low, sell high” but what about when markets are high? Markets could go even higher on further interest rate cuts, but they could tumble at the slightest market shock.
New Lump Sum Investments
So, in simple terms, with lump sum investments you should consider the Far East and perhaps avoid or de-risk in the West.
Profit Take/Switch Profits to Cash on Existing Lump Sum Investments
If you have made gains, then you may wish to consider switching profits to the Far East and perhaps avoid or de-risk in the West or leave in ‘cash park’.
Regular Premiums and Pound Cost Averaging
This is a protectionist approach to investing where you buy units or shares at different prices over 6 or 12 months meaning you have bought in at an average price over the year rather than at a high when markets have fallen or at a low when markets have climbed.
We detail the following example of investing £100pm over a 6-month period at different share/unit prices over that same period.
|
Month |
Amount Invested |
Share/Unit Price |
No Shares Bought |
Total No. Shares |
Value of Fund |
Total Invested |
£ Profit/Loss |
% Profit/Loss |
|
1 |
£100 |
£1.00 |
100 |
100 |
£100.00 |
£100.00 |
£0.00 |
0.00% |
|
2 |
£100 |
£0.50 |
200 |
300 |
£150.00 |
£200.00 |
-£50.00 |
-25.00% |
|
3 |
£100 |
£0.50 |
200 |
500 |
£250.00 |
£300.00 |
-£50.00 |
-16.67% |
|
4 |
£100 |
£0.50 |
200 |
700 |
£350.00 |
£400.00 |
-£50.00 |
-12.50% |
|
5 |
£100 |
£1.00 |
100 |
800 |
£800.00 |
£500.00 |
£300.00 |
60.00% |
|
6 |
£100 |
£0.80 |
125 |
925 |
£740.00 |
£600.00 |
£140.00 |
23.33% |
You invested £600 in total; the stock market is down 20% (share/unit price down from £1 to £0.80) but your portfolio value is £740. You have made a profit of £140 on £600 invested.
As can be seen from the figures, originally the unit price was £1 but then crashed to £0.50, recovered to £1 and then fell again to £0.80. So, over the 6 month period, the markets have actually fallen by 20% but you have made 23.33% during the period.
This is a classic example of pound cost averaging. You have made money by spreading your investment (drip feeding in) over a period to smooth put the peaks and troughs.
When markets are low, consider:
- Investing lump sums or annually at the start of the year for regular savings.
When markets are high, consider:
- Locking in profits on existing pensions and investments then hold in a low risk ‘cash park’ fund and wait for a market dip/correction and then reinvest.
- Locking in profits on existing pensions and investments to hold in a low risk ‘cash park’ fund and then drip feeding back into these same markets over say 1 year to try and benefit from pound cost averaging.
- Consider new regular premium investments to again benefit from pound cost averaging.
- For new, lump sum investments, consider initially investing in low risk ‘cash park’ funds and then drip feed into markets over say 1 year to try and benefit from pound cost averaging.
