To sell or not to sell

“To sell, or not to sell, that is the question:

Whether ’tis nobler in the mind to suffer

The slings and arrows of outrageous equity markets

Or to take arms against a sea of troubles,

And by avoiding them: To sell, to worry

No more; and by a worry to say we end

The heartache, and the thousand natural shocks

That equity is heir to.”

English is my absolute worst nightmare of a subject and over the last few weeks, like many other parents, I have been having sleepless nights trying to figure out how to teach English Literature to my 11 year old and 13 year old for their upcoming exams.

Maths and science I can just about do (with a little help from the geeks in my team) – but English has me completely flummoxed. A bit like the current equity markets! In the original version of this verse Hamlet is contemplating the binary decision of living or dying.

Now given the start of 2016, I sincerely hope that none of us are feeling the same as Hamlet despite being so heavily invested in, and still in love with, equity. But I think quite a few of us are feeling a little betrayed by the markets – it was all going so well until a couple of months ago…

Others have far bigger research departments than me to provide their views on the relative attractiveness and value of equity – some like RBS have fallen firmly off the fence whilst others are still dithering but, for UK pension schemes, the challenges still remain the same:

  • UK pension schemes need to be in equity to both repair deficits and to maintain the level of return they need.
  • Current volatility is a bit scary.
  • Good active managers are very pricey.
  • Timing the market is a challenge.

Risk management is not binary

So do we have any other options? The obvious option is to sell equities if you think they are going to fall but that doesn’t give us the return we need if they don’t fall. It doesn’t have to be such a binary decision. As a result, we have noticed from recent meetings, more and more Schemes are now looking at equity protection strategies that enable schemes to stay invested in equities, have an appropriate return target, but also have the certainty of protection.

Downside protection is not a product

Many readers will have been “sold” (read “put off by”) these before where such strategies are incredibly complicated or, in the case of a Cap and Collar, incredibly standard and not tailored to your needs.

 

 

Downside protection is what you want it to be

A downside protection strategy should be tailored to your needs, in terms of the protection you want vs the cost you can afford. To do anything else is to simply risk paying too much for something you don’t want which will inevitably draw you into the mire of Hamlets troubled mind again.

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