A Conundrum of Logic
If you thought the last chunk was weird, wait for this bit.
Hopefully you will have understood from earlier bits of this WheelieBlog Series that my overall approach is to have about 60% of my Overall Exposure in Normal Shares and then to have the remaining 40% roughly in Spreadbet ’Virtual’ Exposure.
This then makes me think. Why don’t I just forget about owning any Shares at all and just go 100% of Exposure as a Spreadbet ‘Virtual’ Portfolio? If I did this, I could up my Exposure probably by 100% - i.e. I could have DOUBLE the Exposure that I have now. Obviously this would mean that any actual £s return I make in a Year would be doubled - and of course any Loss would be doubled. It has a certain appeal I have to admit (not the Loss bit obviously.)
My current thinking is that I just do not have the guts to do it - although I actually think I probably could if I tried. This really is a High Class problem and only something that I could possibly contemplate if my confidence was extremely high - it seems very dangerous.
There is a certain feeling of safety in using my Mirrored approach based on an underlying Portfolio of Normal Shares. It is weird though, I probably am a silly chicken to be honest.
I do not recommend that any readers should do this Spreadbet only approach - the psychological impacts are hard to predict. That is another big factor - would I behave differently if I had so much more exposure and what would be the psychological impact of seeing such huge swings in my Spreadbet Account that would arise from such a large Virtual Portfolio? It just feels inherently dangerous. Funnily enough, Robbie Burns appears to take a similar view in his Spreadbetting Book - available in Wheelie’s Bookstore as per usual (god, I am even boring myself with this constant Advertising - LOL).
One thing I have been thinking about is that if and when we get a proper huge sell off, maybe even a full Bear Market, I might increase my Exposure on Spreadbets a bit - perhaps as much as 20% more. We shall see, hopefully it is a consideration that is a long way off. It makes some sense to increase Exposure when Stocks are Low and to reduce Exposure when Stocks are High. This could be something to write into my Rules Document at the relevant point in time (please see http://wheeliedealer.weebly.com/blog/yearly-trading-rules-parameters-template).
igIndex Share Portfolio as Collateral
igIndex have recently introduced something extremely interesting to me. They have started doing a Normal Sharedealing Service which seems reasonably competitive with prices and stuff although nowhere near iweb-sharedealing.co.uk. However, the bit that is really appealing is that you can use a Share Portfolio as Collateral (Security) for a Spreadbet Portfolio - i.e. some of the Margin can be from your Normal Shares.
This is really something very special - although fraught with Danger. At the moment, my Margin Cash is ‘dead’ money - it just sits there doing nothing. If I can effectively buy Normal Shares with my Margin Cash, then this means my ‘dead’ money is being put to work. Pretty awesome.
I have not started doing this yet but I intend to. I was thinking that if I have the same Stocks in my Sharedealing Account with igIndex as I do in my Spreadbet Portfolio, then this will be really Risky because everything, by definition, would fall together. So, I reckon the best approach would be to create a copy of my Income Portfolio of Low Risk, Boring Shares as the Shares Account with igIndex and then create a Virtual Spreadbet Portfolio more based on my ISA as I normally do. This way there is less matching and correlation, so if the Markets Drop, it may not be quite as difficult to manage.
Many people get their ‘Risk’ from Trading and / or ‘Investing’ in High Risk, Low Quality, situations where they can get outsized Rewards if the trades go in their favour. Risk and Reward are inextricably linked - you cannot get Big Reward without Big Risk - so if you want more Reward, a Low Risk approach might not cut the mustard.
Low Risk means Low Reward - usually.
I view this differently (I bet you didn’t expect that from WheelieD) and my way of taking on Higher Risk (so I can get Higher Reward) is to Invest Long Term in Quality but then to use Leverage to up the Risk Level - I think this is a Mathematically Pretty approach and is far easier and much less stress inducing - assuming you know what you are doing.
In a way the mathematical simplicity appeals to me. If you can CONSISTENTLY make on average 5%, 7%, 10 % (or more if you are very good) a year etc. on a Portfolio of Normal Shares, then it is a logical exercise to recreate as a mirrored Virtual Portfolio - you'd almost be stupid not to. If you understand and control Exposure then it seems pretty ‘safe’ and almost free money. Think back over the years what extra Dosh you could have made if you had taken such an approach……..
Sort of makes me think anyone not doing this is leaving £10 notes on the floor that they could easily pick up....I am not advising anyone, just pointing out some logical, mathematical, facts....
OK, you will get bad years, but if you manage things carefully, especially your Exposure, then you can ride safely through these - yes, you will lose money, but the good years will more than make up for it.
I appreciate that in a World where we have Higher Interest Rates, this ‘mirroring’ approach might not work, or will become not worth the effort. However, we are probably a long way off this event and it has never been an issue for me for years and years. Anyway, if Interest Rates rise, then at the point where they make mirroring ineffective, we probably need to be Shorting anyway.
I hope this WheelieBlog Series has been helpful at increasing your knowledge and understanding of how Leverage can work for you, especially with Spreadbets. Most of the thinking in here applies to other forms of Leverage like CFDs, Margin Accounts, etc., but there is one simple thing to remember - Control your Exposure.
Even if you don’t use a Mirroring Approach like mine, at least understanding Exposure and its effects will help you exploit Leverage in as safe a manner as possible.
In response to a Reader Request from 66rj (@A1Mhigh on the Tweet machine), below is a list of links to the earlier parts of this Blog Series:
Auf weidersehen, wd
Er, you’re reading it……..
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