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Choosing the right investment instrument is as important as having the correct idea (of the housing crash)

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Mikael Syding
30 Nov 2018 | 4 min read
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There it is central to how you go from idea to profitable execution. Where do you get the most accurate exposure, best liquidity, maximum cost-effectiveness and most appropriate loan or leverage?

There are about three orders of magnitude more start-ups per year than there are unique ideas. Thus, execution and choice of founders are much more important than the idea, regarding the fraction of one percent that succeeds. There are thousands of social networks, but few WeChat and Facebook. There are a hundred thousand video stores but not so many companies that can compete with Netflix.

Something similar applies to the financial market. There it is central to how you go from idea to profitable execution. Where do you get the most accurate exposure, best liquidity, maximum cost-effectiveness and most appropriate loan or leverage?

Assuming that rising interest rates have made you forecast a weaker home market in the US, but how do you best expose yourself to earning your market vision? The housing market is one of the few leading indicators for the business cycle. Even through the recent crises, housing has reliably predicted both going into and out of recessions and periods of growth.

This time you may have already noted falling home prices and the number of traded homes, even though we are fairly early in the interest rate hike cycle. You might predict the policy rate being raised one percent more before the Fed pauses, you think American retirees are forced to sell their houses and condos together with shares to finance the last part of the pension when the mutual funds are insufficient.

For a long time, stocks were the only reasonable option for a normal private individual, but nowadays, in principle, anyone can invest in anything with a few simple clicks. It's just about what market vision you have and what analysis you've made of appropriate tools to get the right exposure.

An investor must ask what will go up the most or fall the most, and where the probability-weighted movement becomes most reliable and investmentable? Is it perhaps rising dollar or gold that has the best combination of motion size, direction, and uncertainty in the forecast? Or are the short or long-term interest rates the easiest to invest in?

It is not only the choice of asset class and geography that determine the final result, but not least the type of investment instrument you decide to use, for example. index funds, hedge funds, shares, government or corporate bonds, ETFs and the whole class of different ETPs. The latter, traded products of various kinds include bull and bear certificates as well as minifutures that have different methods of leveraging leverage, ie dealing with loans and larger movements than the invested amount would otherwise allow.

For some, it is appropriate to remain completely passive and only keep a monthly gap in benchmark-lowering equity index funds with low fees. Then market vision is just a pastime and brain gymnastics, something to talk about on the lunch break or perhaps a story to sell to its customers.

Others are more willing to put their money where their mouth is by leaving the daily decisions to well-chosen hedge fund managers who can be pronounced more or less positive or negative oriented, net neutral, only asset-focused or any other of dozens of different strategies that suit different wells in different market scenarios.

Pure equity investments are usually the best investments if you plan to keep your investments untouched for a long time, but sometimes you do not have access to the shares you are interested in, or, for example, lack the ability to shine, or have such a strong and clear idea of the development that you are prepared to take higher risk with a loan for the potential of higher returns.

For those who want to take a short-term position in an asset you usually do not have the opportunity to trade, or to temporarily increase or hedge your main portfolio, there are a lot of ETPs. You can, for example, strengthen your current position with bullet certificates on different stock indices or foreign stocks, or rather temporarily protect your long portfolio against sudden cases on the market using minifuture's short or bearer certificates.

The certificates have constant leverage and daily rebalancing, making them less suitable for long periods of time. In return, certificates do not go as fast to zero as a mini-nominal loan with nominal lending if you are in a hurry to get the market against you for many days in a row. On the contrary, on the contrary, if you enter the correct certificate in the right market, a 5x certificate per day goes five times as much as underlying, as the loan is adjusted every day.

Thus, the daily leakage is greater for certificates than mini-futures, which means you only keep them short times, but at the same time the face is much bigger if you get quite right while the lower side is smaller. In practice, the loan increases for each day as a miniature trip goes wrong. Minifutures are nevertheless the right instrument if you think it may take a while for your market view to come in. If it were going to be right, you can always gradually roll it into similar mining futures with a loan ratio that suits you better.

The example of a crash and US pensioners in financial problems is not taken out of the air. And in the light of the effects of rising interest rates, falling housing prices and shares, and possibly rising dollars, the most interesting investments are now:

(Long) Bitcoin via track certificate and short Swedish and US stock market through mini-futures, possibly a short-term positive position on stock markets in December through bullet certificates that can capture a temporary bounce, and various ways to get positive exposure to gold and silver, primarily gold that can be a place of escape when most things fall. Gold is at the end of a 7-year bear-market, while stocks have gone up for ten years. It's time to change each other. Bitcoin is more a question of the system continuing to expand, and after a decline of 80-90 percent, it would be a good time to re-enter if you have left. The real HODLers have remained in all the way down, and now almost completely stopped shopping with their in their opinion, temporarily too cheap coins.

It may be time to buy the dips in gold and Bitcoin, but to stop buying the dips in bonds, houses and shares for a while. Everything moves in cycles. On a monthly basis, it is not impossible for us to see a bounce upwards in stocks and bonds, and at the same time new bottoms in Bitcoin and gold. That is precisely why it is so important to choose the right instruments for the right time horizon and overall view.

@Mikael Syding

This information is in the sole responsibility of the guest author and does not necessarily represent the opinion of Bank Vontobel Europe AG or any other company of the Vontobel Group. The further development of the index or a company as well as its share price depends on a large number of company-, group- and sector-specific as well as economic factors. When forming his investment decision, each investor must take into account the risk of price losses. Please note that investing in these products will not generate ongoing income.

The products are not capital protected, in the worst case a total loss of the invested capital is possible. In the event of insolvency of the issuer and the guarantor, the investor bears the risk of a total loss of his investment. In any case, investors should note that past performance and / or analysts' opinions are no adequate indicator of future performance. The performance of the underlyings depends on a variety of economic, entrepreneurial and political factors that should be taken into account in the formation of a market expectation.

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