I don't understand how to turn my economic predictions into strategies

  • #1

Main Question or Discussion Point

investment/hedging strategies.

Let me give you an example. Let's say I believe the following will happen

  • Price of oil will go up at least 50% over next year
  • DOW will dip under 15,000 by end of 2017
  • Median home price will drop 30% over next 2 years
How do I actually turn these predictions into financial instruments? I have a Vanguard brokerage account and I know how to make daily bets against markets by using inverse ETFs, but I don't know how to make risky bets that span weeks or months or years.
 

Answers and Replies

  • #2
Simon Bridge
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What you are talking about mostly is peculation - you have to decide if your belief is good enough to gamble.
The principle is to buy low sell high ... so at the most direct level, you think oil prices will rise over the next year? Buy oil now and sell after next year.
The oil price has a knock-on effect due to oil being used in everything, but the manufacturers may not always be able to pass the increased cost down the supply chain (ultimately to the consumer). You have to decide if your portfolio includes investments that are affected by the oil price, and check the history to see how those investments usually fare which prices rise.

It's the same as using information for any kind of gambling.
Good luck.
 
  • #3
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Trade options. You only have to pay a price to buy the option, and you buy it with those expiration periods. The advantage over buying future contracts of those assets is that this way your risk will be limited and set at the beginning, whereas with futures you would have to be ready to endure serious drawdowns if you were to hold until a specific date.
 
  • #4
EnumaElish
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Betting sites. Also you can buy or short sell index funds. In your case oil, Dow or real estate funds. Or buy/sell options on them.
 
Last edited:
  • #5
Vanadium 50
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As mentioned earlier, you need derivatives (options being the simplest example). For #2, you would want to do a short sale of a DJIA-tracking ETF, or just the 30 underlying stocks.

However, what you really need is a book. Your position is that you can do better than professional traders on derivatives that you can't even name. That's not likely. You need a book.
 
  • #6
strangerep
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Last edited by a moderator:
  • #7
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Random fluctuations are unpredictable and tend towards zero in the long term.
'Insider' trading though is profitable in the long term, but generally illegal.
 
  • #8
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DO NOT TRADE OPTIONS OR FUTURES! Please. These instruments were designed to hedge against unfavorable movements in securities prices during periods of exposure to changes in price. They are an insurance policy. However traders have turned them into gambling instruments. IMO, there should be no naked positions in options or futures. If you do not own the asset, you should not trade the contracts. All that being said, they are great instruments for covered positions. That is, you can hedge losses from downward pricing in assets you own by buying put options (usually 1 mo to 12 mo), or you can leverage returns by buying call options (same duration). I do not offer advice on where to invest money, but I will warn of the dangers of trading options. They are not for retail investors per se.
 
  • #9
CWatters
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+1

I would also avoid options and futures. Too risky. ETFs are safer but it depends on the ETF. ETFs trade like a share and generally track an index or commodity like Oil.

There are plenty of guides to ETFs out there for example..
http://individual.troweprice.com/public/Retail/Products-&-Services/Brokerage/Exchange-Traded-Funds

You can buy "Short ETFs" that go up when the index or commodity they are tracking goes down but they are not without problems. If you think you understand Short or Inverse ETFs read this..
http://news.morningstar.com/articlenet/article.aspx?id=271892
 

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