Safety Risk Strategy

Safety Risk Strategy

The idea that long-term gain is always true in very long periods of time. However, there are structurally bearish markets or “side” where sometimes you need to get in and out, rotate portfolios and keep track of investments.

On the markets side, experts advise you to use technical analysis indicators (MACD, RSI, Bollinger Bands …) to detect both uptrend and downtrends and know, therefore, the right time and the appropriate values which we invest. However, there are other techniques that do not need to delve much into the statistics, which are equally valid to look different trends. Among the latter emphasizes the study of moving averages.

The study of moving averages is to produce a graphic that is expressed for example the evolution of the Dow 35 in 2004 and also display your moving average of 22 sessions in the same period. With this graph we would conclude that the Dow had in 2004 two very pronounced upward trends. In these times of market exuberance was recommended to invest in stock market.

Downtrends occur at the time of the Ibex 35 chart breaks down the moving average of the last 22 sessions. An example of this was the March 11, 2004, the day of the Madrid bombings, when the Dow closed at 8,100 points around while in the later days fell to 7750 points. In these times of market weakness, experts recommend staying out of the equity market and wait for the arrival of an uptrend in the stock market to invest.

Safety Risk

Uptrend are marked by the time the Ibex 35 graphic breaks upward moving average of the last 22 sessions. The clearest example in 2004 was 29 September (just before it started to ease oil prices given the opportunity to market to recover) when the Dow was at 8050 points. Thereafter, the index ended the year close to 9100 points which was a 13% increase in profitability.

Common sense advises each investor trading market takes place while bullish phase and stay out of equities during times of downtrend. However, the strategy proposed by Self Trade Bank, the “safety-risk strategy,” advises, whether bullish or bearish times, always invest in the stock market and the most important thing is to know the values that we bet on every time.

To find the values that we must invest in every moment, you have to go to beta, which measures the degree of correlation between a value and the rate at which it belongs.

Thus, if beta is greater than unity means that the value is highly correlated with the market. In practice, with a beta value of 1.1 will rise by 1.1% when the market goes up 1% and 1.1% fall when the market dips by 1%. This is a risky value characteristic of markets with a clear upward trend.

If, by contrast, has a beta value less than unity means that the correlation between this and the market will be minimal. For example, a beta value of 0.9 will rise by 0.9% when the market goes up 1% and the same percentage fall when the market fall by 1%. This value has less risk and is therefore recommended in bear markets.

For this reason, the safety-risk strategy should the investor be positioned in high betas with market trend and low betas position in downtrends.

However, this strategy seems so simple, has some disadvantages among which are:

1. This is a high turnover strategy, ie whenever the Dow cut its moving average we sell the entire portfolio to buy back 100% by changing the composition. This change leads to greater spending on brokerage fees to be taken into account when calculating returns.

2. It is not advisable strategy for low amounts due to the high price of the portfolio committees.

3. The safety-risk may send false signals to investors. Sending signals cause changes in portfolio betas high to low or vice versa do not respond to the reality of the trend and you have to undo the damage immediately with addition of the high commissions.

4. When rotated the portfolio several times a year can not take the tax benefit to be taxed at 15% capital gains (taxes aside for investment in higher values per year).

Safety Risk

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