Below is a general discussion of managing risk using the Quentinvest strategy combined with IG share and CFD accounts (see How to use IG for more on opening and using IG accounts)
Before that I should note a number of risk warnings required by the UK regulatory authorities, relating to share investing.
Investing carries a variety of risks and it’s important you understand them before making investment decisions
Throughout our site you’ll find reference to the sorts of risks you should consider. It’s important to bear these in mind as you browse through the site – you’ll find tips, ideas and information that help you sift through the wide range of investments available to choose those which are right for you.
General risk warnings
If contemplating an investment or investment service, the customer should seek independent advice or make his/her own decisions as to the suitability of the investment or service.
Share prices, their values and the income from them can go down as well as up and investors may get back less than their original investment.
Past performance is not a guide to future performance.
The extent and value of any tax advantages or benefits arising from the use of tax-advantaged services such as ISAs, SIPPs and CTFs will vary according to the individual’s circumstances. The levels and bases of taxation may also change. Quentinvest does not provide advice on taxation issues. If required, customers should seek independent advice from people suitably qualified to provide such advice.
Quentinvest or a connected company, their clients, officers and employees may have a position or engage in transactions in any of the investments mentioned within its publications and on this web site.
- The information contained within this web site is believed to be correct, but cannot be guaranteed. Any opinions expressed herein are given in good faith and may be subject to change without notice
- Published information, including within the site, is not intended to constitute an offer or agreement to buy or sell investments and does not constitute a personal recommendation.
- This website does not give personal advice based on your circumstances. It provides information and analysis so you can make your own informed investment decisions. The value of investments can fall as well as rise, and you may get back less than you invested. An investment’s past performance is not a reliable indicator of future performance. Tax allowances and the benefits of tax-efficient accounts could change in the future.
Investing with borrowed money, for example, on a CFD account, can mean you lose more than your deposit.
Below follows a more general discussion of risk, with some suggested strategies for making sure that you keep your level of risk at manageable levels. Risk management is a keep element in a successful investment strategy.
Managing risk so you can survive and profit from stock market crashes
It is an old stock market adage that if your investments are keeping you awake at night you are taking too much risk. This is a good rule. It is vital that you are not only relaxed, when share prices generally are falling but that you are positively licking your lips at the opportunities coming once the correction has run its course and share prices resume the long-term uptrend that has prevailed, with interruptions, for seven decades since the war.
Being totally chilled, when share prices are plummeting is not easy, especially if you are using borrowed money. This means that managing your level of risk is fundamental to the success of the QV strategy.
One simple way of dealing with this is to start carefully, using an approach, which I call ‘slow investing’. I have come to the conclusion that for many, even most subscribers, ‘slow investing’ is the way to go.
Four levels of risk
I have four levels of risk for QV investors. I categorise these as ‘zero’ risk, ‘sensible’ risk, ‘crazy’ risk and ‘insane’ risk. ‘Zero’ risk is a misnomer because there is no such thing as zero risk in equity markets, it is a jokey name for an aspiration. A more accurate but less catchy name would be low risk.
Let us start at the other end with insane risk. This means using a CFD account with the maximum leverage permitted by the IG margin rules. You can buy shares in companies like Google (trading as Alphabet), Amazon, Facebook, Priceline and other widely traded US companies on five per cent margin. If you trade on that margin and the value of your shares rises five per cent you double your money. If they fall you are wiped out; that is ‘insane’ risk trading only suitable for speculators using the market to gamble.
‘Crazy’ risk is where you limit your leverage to five times your equity but trade at or around that five times ratio most of the time. In rising markets the results will be exciting but you will be savaged, whenever markets hit a bump in the road and are likely to be forced to sell into an unwilling market; just the thing you never want to do, when following the QV strategy.
Sensible investing is an aggressive approach but one designed to maximise your chances of surviving a sharp correction. It is best adopted from a position of strength’ i.e., when you have a good grounding in the QV strategy and a substantial cushion of profit., for example you have already doubled your invested capital.
It may also work if the funds you are committing to the QV strategy represent a small fraction of your liquid assets. If you have say 250,000 pounds in shares and other more liquid assets then it could make sense to follow a ‘sensible, i.e., fairly aggressive QV strategy with say 10,000 pounds in your IG stockbroking account.
You can be aggressive because with 10,000 pounds of equity, which is being committed over time and into strength your likely exposure at least in the early days is going to be no more than 5,000 pounds supporting a 25,000 pounds portfolio. Thanks to your 240,000 pounds of other liquid assets you can easily protect your position in the event of a crash, will not have to sell and will be able to act on the follow-up buy signals at attractive prices that invariably come after sell-offs.
Many of my subscribers will not be in the happy position of having £250,000 in cash and shares. Slow investing is for them and is specifically designed to generate attractive returns with a low enough level of risk that you are always able to follow the QV rules.
Follow the rules to win in the end
This ability to follow the rules is key. I would contend that as long as you can follow the QV rules in your investment strategy it is only a matter of time before you are seeing very good returns on your investments. Better still the growth is like to follow an accelerating path as you build scale in your portfolio.
So how does slow investing work. It is the QV strategy but every aspect of it is slowed down, made less aggressive if you like. A possible slow investing strategy could operate as follows.
Step one, you open your two accounts with IG, a share account and a CFD account (the type of accounts you can open will depend on your level of experience and net assets – see How to use IG for more on this or refer to their web sit).
Step two, you put a lump sum in your stockbroking account. Let’s say it is ten thousand pounds but it could be less, even one thousand pounds.
Step three you commit to adding five per cent of the initial stake to the stockbroking account every month. If the initial sake was ten thousand you add five hundred a month; if it was one thousand, you should add fifty but IG’s minimum is two hundred and fifty so you should add two hundred and fifty pounds every five months.
Now you are ready to start investing. On the QV programme we recommend shares at a random rate as exciting opportunities present themselves (as a subscriber you will be alerted to all of them) but slow investors should buy more slowly, maybe as slowly as one a month. This may seem slow but still means you will end the year with 12 shares in your portfolio.
Finances permitting you can up this to one a fortnight or even one new share bought a week but always being mindful that your risk levels are sensible.
If you are buying at regulary intervals there should be a pound cost averaging effect turning market volatility to your advantage as some shares are bought when markets are low.
On the one-share-a-month programme you are investing five hundred pounds each time so by the year-end you would have invested six thousand pounds in 12 different shares, while putting sixteen thousand into your account ( an initial £10,000 plus 12 lots of £500).
However this is not the end of it because you will also be making follow up purchases. These take place in your CFD account so involve borrowing from IG against the security of the initial purchases made in your stockbroking account. The likely maximum number of follow-up purchases would be around 20 so could involve an investment of another ten thousand pounds.
This means your total investment would equal the cash put into your account so your leverage at this stage would be zero. In practice the value of your portfolio would likely be well ahead of your cash invested because the follow-up purchases would only be triggered by rising share prices.
Year two would see another six thousand going into the account from your five hundred a month cash injections exactly balanced by the six thousand pounds invested to add another 12 shares to your portfolio.
By the end of the year you would be operating the follow-up buying programme on 24 shares and should be showing a substantial profit on your portfolio. If you are not this would be because of sustained negative stock market conditions and in that event you would not be making many follow-up purchases.
Either way you should still be operating at a comfortable level of leverage, well within the IG margin limits if indeed you have any net borrowings at all. Furthermore by this time you should have a good feel for how the system operates and be well placed for sensational progress, whenever the market starts to move ahead again if that has not already been happening.
The advantage of the slow investing approach is that you are operating well within your limits in the first two years, while still building a strong, diversified portfolio with a cross-section of the world’s top growth shares.
After that you can either just operate the follow-up buying system with the 24 shares you have until you are very substantially in profit and then resume adding new holdings or you can push on with adding to your portfolio on a monthly basis.
You may even feel so confident and have so much profit that you can shift from zero/ low risk investing to something nearer the sensible risk investing approach, which can deliver spectacular gains if sustained over a period of years.
Even if you always follow the slow investing approach you can still do very well, with the value of your portfolio becoming a multiple of the money staked. In 10 years time you could have 120 different shares in your portfolio with follow-up buying meaning that some of those holdings having become very substantial in their own right.
If your resources are more modest, say the one thousand down and two hundred and fifty every five months programme so sixteen hundred pounds after a year the build up in your portfolio will be slower. You might buy say one share every three months so you are operating the follow-up programme on four shares after one year and eight shares after two. Again you would be buying new shares, with cash and the follow-up buying programme only kicks in if share prices are rising so your maximum leverage would be well within prudent crash-proof limits.
Yet you could still find yourself making serious money because after two years you would be following the buying programme on eight shares so potentially committing four thousand pounds on every round of follow-up buy signals and in strong market there could be as many as 32 of these in a year.
Investors on the very slow investing strategy might be better suited, at least initially with Quentinvest for ETF, which is aimed at both inexperienced and experienced investors
As an additional form of prudence subscribers following the slow investing programme may decide to limit their maximum borrowings in the first two years or until they have built up a substantial cushion of profit to 50pc for a ratio of assets to borrowings of two versus the five suggested as the maximum in the sensible risk programme.
Remember that the way the QV buying programme works if you have a monster winner in your portfolio you will end up with a hugely valuable monster holding in that stock because the strong performance of the stock means there will have been many follow-up buy signals and plenty of equity generated to finance all the CFD purchases you would be making.
If all this sounds very confusing just start slowly and learn as you go along. It is demanding but that makes learning how it works all the more satisfying.