World + Dog seems to be figuring on a Greek exit from the Eurozone. The Deutsche Bundesbank has just given Greece the thumbs down
Current developments in Greece are extremely worrying. Greece is threatening not to implement the reform and consolidation measures that were agreed in return for the large-scale aid programmes. This jeopardises the continued provision of assistance. Greece would have to bear the consequences of such a scenario. The challenges this would create for the euro area and Germany would be considerable, but manageable given prudent crisis management.
The man from the Bundesbank says NO. Cut ’em loose and let ’em hang by the looks of it. One presumes this thinking extends to other high places in Germany. Since they’re the only guys with any cash at the moment, what gets done gets to be their call. That’s the whole point of money – it’s condensed power 😉
So the Ermine casts a beady eye around himself and asks the question
How can I use this to make money
There’s also a corollary to this
How can I minimise the effect of the sucker punch everybody says a Grexit will cause.
There seem to be two obvious things Grexit will spawn – equities will take a hammering, and that US and UK governments will reach for the QE taps so cash as a store of value will take a pasting in the medium term. There are loads of other things that could happen if there’s a chain reaction but the uncertainties are far too much for me to get a decent handle on.
The obvious thing to do is to fly into the storm – the fear and loathing will mean everybody hates shares; we’re already seeing some of that. What scares me in the background in the money printing suckas and their trigger-happy QE fingers. I hold a fair amount of cash and will have more once I get my redundancy pay, and QE will destroy the value of this.
Pound Cost Averaging – daily if possible
I’ve held off buying much in my ISA apart from the regular FTAS index and EM index funds so it’s about 80% uncommitted. The trouble with trying to buy into a market crash is ideally you want to buy in itsy bitsy bobs say once a day because you can’t call the bottom. You’re doing the old pound cost averaging thing but over a shorter timescale.
The trouble is I’ll get hammered with dealing charges at £10 a go in my case with iii. Okay so they have introduced a frequent trader rate of £5 after 10 trades a month but I’d still get to eat £50 worth of trading costs before getting the reduction.
So how would I go about doing that. And what would I buy? It could be a great way to pump up my HYP with stocks on the cheap. However, the more stocks I try to buy in little bits, the worse the dealing costs issues are.
spreadbetting is one way to consolidate daily orders
My first thought was to increase my holdings of particular stocks. One way I could get round dealing costs is to use IGindex, buying say £1000/60 = £17 worth of daily funded bets of the shares I want to buy. The purchase amount is a bit higher because the two months have eight non-trading weekends. Once two months have passed, I take the next regular investment £1.50 opportunity to buy whatever IG says my spreadbets are worth and clear my position at IG. I save £8.50 get my daily purchases, but eat the IGindex spread which inconveniently widens in times of market turmoil. And I pay them long interest for the privilege but their rates aren’t bad at all so for two months it’s OK.
Trouble is the minimum order size is 1 point which represents 100 shares. So if I wanted to buy daily the share price had better be less than 17p or I reduce the buying frequency to match.
That’s a harsh restriction, so I need to reduce the number of shares I buy or increase the amount I am investing. The ISA limit is an issue limiting this to about 8k for me though I may double up on that.
The Grexit issue is general fear so it doesn’t matter that much what stocks I buy. Perhaps I could simply buy my favoured index, the FT Allshare. It would actually be possible to buy this on autopilot straight in my ISA, the minimum amount for the HSBC CPUKI fund is £20. You don’t pay dealing fees on CPUKI with iii so although it’ll upset iii buying such a small amount daily it’ll probably work.
When to start buying – that is the question
Of course the whole point about stock market investing is buy low, and the $64,000 question is what exactly does low look like? 🙂 CPUKI has a poor yield of 3.5% at the moment. I aim for an income of 5% in my ISA. If you zoom out in worldview and think about what that means, companies in the FTAS have been making profits to the tune of about 3.5% of the current 234p unit price. They’ve been doing that in what has been a pretty rotten economy. Although Grexit would give the UK economy a good kicking the big advantage of looking at this now rather than say in 2008 is that these profits haven’t been inflated by a long boom, with easy money in people’s pockets as they withdrew equity from their homes to fund an unsustainable lavish lifestyle. So I could simply say I have a target price of 3.55/5 times 234p ie 166p, and I stand a middling change of getting the 5% return.
Another advantage I have now is that we’ve had one big crash (2008/9) and a minicrash (summer last year). Wandering deep into the sort of territory you shouldn’t really go into I will take a look at that and see how reasonable that start target is.
It’s too greedy, really. I’m never going to get my 5% return unless Armageddon happens, and the return might drop a tad then. I could be less greedy and settle for a 4% yield, that would give me a price target of 207p. That’s not a bad fit. If I refactor the target by inflation it would have been 195p in 2009.
If I had a time machine and went back to Credit Crunchville I could have been buying for a year if I bought when the price was below 195p with a couple of short hiatuses.
If Grexit is going to be of a similar scale to Lehmans then a 207p target looks good. So the plan is to buy £40 worth of CPUKI every day the price is below 207p. It would take me 200 buying days to burn through my 8k remaining ISA allowance assuming the crisis were as long as the credit crunch. There is a nasty dichotomy between increasing the amount committing more money early into the crisis at a high price and possibly running out (say I bought at £200 a day I’d run out in two months), as opposed to not getting enough money into the market if the crash is short and V shaped.
Although there are some pundits that say Grexit would lance the boil and lead to a swift Eurecovery, I’m not convinced. The whole financial system is still hammered from 2009 there are all those French banks that our banks lent money to. And those German banks. And then the Spanish with their empty buildings. Oy vey. I think a slow and steady approach is the way…
It’s hard to fly into a financial storm, which is why I’m thinking about this now even thought the Greeks haven’t yet been hoofed out of the Euro. For me it’s easier the second time after having got a 20% win on my AVCs started in 2009. In good times stockpicking and asset allocation are the only way for active investors to get ahead. In bad times having the guts to charge a market crash head-on is probably enough. It worked well enough for me, and others too.
Grexit may never happen or the market may have discounted most of it already. However I’ve told iii to send me an email alert when CPUKI falls below 207p. I can’t see how to set a regular purchase with a limit condition.
Dodging the sucker punch
Avoiding the destruction in the value of cash is another thing however. I am badly exposed to this as my entire AVC fund is in a cash fund, I hold a couple of cash ISAs and a load of NS&I ILSCs. At least the latter are inflation-linked. Having the AVC fund as cash is good entering a crisis but not necessarily in the years afterwards. I may move some of that into the FTSE100.
UKValue Investor has turned the handle on the FTSE100 using CAPE and all that stuff. There may be a case for a more nuanced approach with the AVCs, targeting 10% at the 5000 mark sliding to 50% at the 4200 mark. The percentages are low because I am near to drawing this and have to crystallise the funds on drawing the pension. A hearty stock market crash can typically halve the index peak to trough. With 50% allocated to stocks I can eat a halving of the index because that will only reduce my AVC fund by 25%. I wouldn’t be chuffed at that but I could live with it particularly as what I’m going to do with the fund is invest it so I’d be buying cheap if I had taken that hit.
There’s not much else I can do to avoid getting caught in the crossfire of Grexit. Some things will affect me less because I am debt-free. I didn’t have all the foreign holidays or nice cars that many of my colleagues had so my good times were less good. However, my hard times are at least not exposed to mortgage rates or credit card rates.