Protecting Yourself From GFC 2

I’ve been very lucky in that I started working full-time in 2009, which is right when the GFC hit. When I started working full-time, I started saving up about $50k per year. I was able to do this because I lived with my parents and didn’t have too much to spend on other than internet and food, so I plowed the money into shares, ETFs, and mutual funds. Luckily for me, the stock market recovered heavily after GFC when central banks around the world decided to print money to prop up stock markets.

Recently, I have become concerned about a potential GFC 2, so lately I’ve been reading books about technical analysis in an attempt to try to figure out when to sell before a crash.

Below is a graph of the ASX200 for the past year with bollinger bands overlaid. Notice how if you sold when the index hits the bottom band and bought when the index hits the top band, you’d capture all the gains and avoid all the losses.

Bollinger bands on the ASX200 August 2015 (source: Yahoo7 Finance)
Bollinger bands on the ASX200 August 2015 (source: Yahoo7 Finance)

A problem I have is that a lot of the assets I have are illiquid. Shares are diversified and selling each one would be time consuming. Real estate is incredibly illiquid, and I don’t have to explain why. Taking money out from mutual funds requires you to fill in various forms and wait many weeks. Furthermore, selling assets may have unwanted tax implications. I’ve been a believer in buy and hold for a long time, but I am starting to have my doubts.

Rather than bother with selling assets, a better idea is to use leveraged inverse ETFs. One that has been recently issued on the ASX is the Betashares Australian Equity Strong Bear Hedge Fund (ASX: BBOZ). (Note that this is supposedly not technically an ETF.) How does this fund work? As the website says, “A 1% fall in the Australian share market on a given day can be expected to deliver a 2.0% to 2.75% increase in the value of the Fund (and vice versa).”

If GFC 2 hits again, rather than watch half my wealth disappear, I can protect a portion of it by buying a large amount of BBOZ. The gains in this BBOZ will compensate for any losses. Obviously the more cash I can save up, the more BBOZ I can buy and the more protected I will be. Furthermore, buying at the right time is essential. The bollinger band patterns on the ASX200 are interesting, but I hope to study the markets further to see if I can find any clues as to when GFC2 will hit.

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