Connect with us

Business

Finance: Reduce risks while playing market

Published

 on 

PHUKET: I am asked all the time, by those who know I am patiently waiting for the next crash to re-enter equity markets, if there is some way they can participate now while reducing downside risk. If we are talking about funds that will need to be liquidated any time within the next five or ten years, I would say no. However, if you have a longer time frame, there is one way to increase yield on a portfolio that effectively minimizes the effect of riding out a crash.

Keep in mind I said ‘riding out a crash’, meaning that when a crash comes you will still need to stomach sitting through the downside and hold through until the next recovery. If you can’t stand to see a 30-50 per cent temporary drop in the value of an investment, then you need to wait for the crash and invest when the market represents real value. However, if you don’t need to access capital and wish to draw an income there is a simple strategy that can work.

The strategy consists of creating a diversified portfolio of blue chip stocks to begin with. These need to be reliable dividend-paying companies in industries where they hold a serious long term advantage. You might be lucky to get an average dividend yield of four or five per cent, which generally speaking is not worth the current downside risk of watching your account balance drop like a rock in the next crash.

The part of the strategy that helps minimize the risk is increasing the income by writing ‘out of the money’ call options. You collect a fee, or a premium, for giving someone the right to buy the stock at a higher price in the future. This works best with European-style options, because with these what matters is only the price on the day the option expires. If the price temporarily goes above the agreed upon price, you are not forced to sell and continue to receive the dividend. Using this strategy you can bring the yield of the portfolio to somewhere between 10-15 per cent. There is no downside risk to someone exercising the options, since that means you are selling out of the stock at a price higher than you paid for it and you also collected a fee in the process.

There is nothing for free in this world, and this strategy does not violate this reality. What you are giving up is the opportunity cost if the stocks go up drastically in the future. However, for those needing yield now, this could be an acceptable trade-off in exchange for the extra yield in a low interest rate environment. There is also the obvious market downside, but if you plan to hold through a crash until the next bull market, you can continue writing out of the money options and generating yield the entire time while also collecting dividends.

I would be extremely conservative in how much of an overall portfolio one allocates to pursuing a strategy like this, probably 20-30 per cent. For those who feel like this is too technical of a strategy to pursue on their own, there are very liquid daily trading funds that pursue this strategy as well. You simply lose a percentage of the yield in management fees.

David Mayes, MBA, resides in Phuket and provides wealth management services to expatriates around the globe, focusing on UK pension transfers. He can be reached at david.m@faramond.com or 085-335-8573. Faramond UK is regulated by the FCA and provides advice on pensions and taxation.

— David Mayes

 

Get more from The Thaiger

Join the conversation and have your say on Thailand news published on The Thaiger.

Thaiger Talk is our new Thaiger Community where you can join the discussion on everything happening in Thailand right now.

Please note that articles are not posted to the forum instantly and can take up to 20 min before being visible. Click for more information and the Thaiger Talk Guidelines.

Archiving articles from the Phuket Gazette circa 1998 - 2017. View the Phuket Gazette online archive and Digital Gazette PDF Prints.

Follow Thaiger by email:

What you get for $X27 mins ago

What $100,000 buys you for a condo in Bangkok, Phuket, Pattaya, Koh Samui and Hua Hin

Thailand2 hours ago

Thailand News Today | Activists plan protests all across Thailand

Thailand3 hours ago

Snitching on parking space hoggers could earn you 5,000 baht in Thailand

Sponsored11 hours ago

10 Best Seed Banks that Ship Cannabis Seeds Discreetly to You (Free US Shipping)

Weather3 hours ago

Storm Noru weakens from typhoon to depression as it moves across Thailand

World4 hours ago

Suicide bombing in Afghanistan hits students preparing for exam

Politics4 hours ago

BREAKING: Prayut reinstated as Prime Minister of Thailand

Join the conversation on the Thaiger Talk forums today!
Technology4 hours ago

What role for Thailand in China’s great European EV invasion?

Cambodia5 hours ago

Cambodian delegation in UK to seach for stolen treasures

Thailand5 hours ago

20 baht notes printed with errors, says Bank of Thailand

Crime5 hours ago

Loan shark bombs debtor’s house in southern Thailand

Thailand6 hours ago

Thai researchers develop flood-resistant rice strain

Press Room6 hours ago

Southeast Asia’s hospitality leaders step into the ring to fight for sustainability at PHIST 5

Crime6 hours ago

Horrified relatives attempt ID of disfigured suitcase victim

Travel6 hours ago

Things to do in Bangkok that cost next to nothing (2022)

Travel7 hours ago

5 best spa treatments in Bangkok to pamper yourself this September – October

Thailand1 year ago

Morning Top Stories Thailand | Police to end protests, Human Trafficking | September 14

Thailand2 years ago

Thailand News Today | Thai Airways in rehab, All go for Songkran | March 4

Tourism2 years ago

Phuket’s nightlife. Yes, bars and clubs are still open | VIDEO

Phuket2 years ago

Thailand News Today | Covid passport talks, Thai Airways heads to court | March 2

Tourism2 years ago

Phuket Thai food treats you need to try | VIDEO

Thailand2 years ago

Thailand News Today | Bars, pubs and restaurants ‘sort of’ back to normal | Feb 23

Tourism2 years ago

In search of Cat & Dog Cafés in Phuket Town | VIDEO

Thailand2 years ago

Thailand News Today | Gambling crackdown, Seafood market to reopen, Vlogger challenge | Jan 21

Thailand2 years ago

Thailand News Today | Covid testing for visas, Business impact, Vaccine approval | January 19

Thailand2 years ago

Thailand News Today | Weekend Bangkok bombs, Thailand fires, Covid update | January 18

Thailand2 years ago

Thailand News Today | Stray car on runway, Indonesian quake, 300 baht tourist fee | January 15

Thailand2 years ago

Thailand News Today | Governor off respirator, sex-trafficking arrest, condo prices falling | January 14

Thailand2 years ago

Thailand News Today | Chinese vaccine, Thailand ‘drug hub’, Covid update | January 13

Thailand2 years ago

Thailand News Today | Bangkok may ease restrictions, Phuket bar curfew, Vaccine roll out | January 12

Thailand2 years ago

Thailand News Today | Covid latest, Cockfights closed down, Bryde’s Whale beached | January 11

Trending