Moneywise24 Personal Finance

I have to admit I made a big mistake over the past few months. Actually, it is warned about in books, blogs, and websites, and still I did it. Call it a combination of laziness and wishful thinking.

My investment style

I invest a lot with options (in addition to other types of investments), and although I know it is a risky business, I find that options provide a great opportunity to use the leverage in both directions. I tend to take mid-term to long-term positions, aiming at selling them on the short-term or mid-term. I usually buy call options, using put options only to hedge an already existing portfolio.

Recent developments

Recent development, such as Greece or the rumble in the Middle East, have not been stimulating the stock markets a lot. The challenge is to endeavor and estimate the big picture; is this only temporarily, or is it a more long-term development. If, for example, Greece is already on the verge of bankruptcy, which other countries may potentially follow? Portugal perhaps? Even Belgium announced rigorous savings programs.

My logical mind says …

… sell these high-risk options. This is not the right climate to play around with high-risk options, and trying to foresee a market which at present is not at all stable. In fact, my logical mind clearly tells me, that my mindset in investing should be to try to predict what other investors are bound to do. I just have to take a quick glance at the news headlines, and I can tell that investors are not extremely positive right now.

My emotion tells me …

… to hold on to these investments. Fine, the investments are at a loss now, so why sell? The market is going to recover eventually, this is only a temporary panic reaction (that has been going on for moths). Additionally, if I sell my positions at a loss now, this will be documented as negative capital gains for the month, which I am not looking forward.

God knows how many articles I have read about behavioral finance topics; these articles warn about these type of emotional decisions, which are simply not logical and in the end bad for one’s personal financial situation. In fact, these articles recommend to set a very strict stop-loss and exercise it as soon as the price reaches the stop-loss.

I have to admit, that this was a great learning experience indeed. I had been investing in options actively when the markets were rising, but I had never (up till now) encountered a market which was going downwards. I still strongly believe, that the fundamentals on a global level favor markets to continue to climb on the long-term. However, in the ‘now’ investors are extremely cautious and skeptical.

One additional learning I have to mention, that I have now more actively become involved in hedging my portfolios, especially those positions, which I intend to hold for a longer period. Put options pose an excellent way to profit from sharp downward moments of markets, fairly well balancing out the loss on my long-term investments.