Can market risk be insured?

I often write on Quora.com, where I am the most viewed writer on financial matters, with over 283.7 million views in recent years.

In the answers below I focused on the following topics and issues:

  • Can market risk be insured? Should it be insured considering the other strategies that you can utilise?
  • Should you invest in alternative assets?
  • Should people in retirement own any stocks?
  • How can you invest in a foreign country, apart from through ETFs?
  • Has the pandemic affected my investment strategy?

Some of the links and videos displayed on the original answers might not show up on here, and if so, you will need to refer to the original answers to view that.

If you want me to answer any questions on Quora or YouTube, or you are looking to invest, don’t hesitate to contact me, email (advice@adamfayed.com) or use the WhatsApp function below.

Can market risk be insured?

Yes it can be, through numerous ways such as:

  • Option protection
  • Downside protection, which isn’t full insurance, through structured notes and other instruments.

However, there is are numerous issues. Firstly, the cost of the insurance can be very high.

Second, few people understand how these instruments work. Almost all do it yourself investors should these instruments.

They only work for institutional investors or “regular” investors who have access to advice.

Finally, there are cheaper ways to get hedging. The easiest way is through owning stocks and bonds, and being long-term:

People can further reduce risk by investing every month to buy at different price intervals, and buying globally diversified funds like MSCI World.

Such a strategy has historically had a 100% chance of not being down long-term.

Even if a Japanese investor, who started investing during the bubble, had 1/3 in local stocks, 1/3 in global stocks and 1/3 in a bonds index, he/she would have done well in the last few decades, especially if dividends were reinvestment.

That brings me to another point. Dividend reinvestment further reduces risks.

The Japanese Stock Exchange is the only major one to be down over a 30year+ time period.

The market was briefly at 38,000, and has been trading at 28,000–30,000 this year.

Yet, an investor who just reinvested dividends would not be up. It is a bit like owning a rental property.

If your capital value is down by 30%, you can still make it up from the dividends.

The same thing can be observed in the UK. The FTSE All Stars (FTSE100, FTSE250, FTSE350 and small caps) has done quite well in the last twenty years.

But the FTSE 100 itself has been stagnant in capital value terms but not adjusted for dividends reinvestment:

The only reason most people want insurance or protection is emotional reasons.

It feels more comfortable than just waiting for the market to recover, even if you know rationally that it will.

That isn’t a good reason, in of itself, to go for that strategy.

What factors should be considered before investing in alternative investments?

There are quite a few.

The main ones are:

  • Do you understand the investment?
  • If you don’t understand the investment, then do you have access to an advisor who understands it?
  • If you don’t understand the investment, and you don’t have an advisor, then why are you investing to begin with? It is probably for a bad reason, like a friend or family member has done well in the investment.
  • Even if you understand the risk, are there additional risks to take account of, like currency risks? Moreover, what’s the risk:return ratio like? Most alternative investments aren’t good, in most situations, for the majority of ordinary investors.
  • Can you afford to lose the money?
  • Can you pull out the money in the early years?
  • What are the fees compared to most other investments?

They can have their place for larger portfolios, and some can be excellent.

For example, angel investing, private equity and other forms of alternative investments can play a good part in a wealthy investor’s portfolio, if the risk is understood.

Some alternative investments, like REITS, can also be relatively vanilla. They are just less mainstream than some others.

Who should consider owning stocks in retirement?

This might shock some people, but I would argue everybody. Let me explain.

In the traditional approach, you will “sell” your investment account to an insurance or investment company in return for an income for life.

That is called an annuity. If you could get a good annuity rate, in addition to the reasonable interest rates the bank once offered, there could have been an argument for reducing your allocation to equities.

Even as recently as 2006–2007, you could make up to 6% per year keeping your money in the bank in the UK, when inflation was 2%-4%.

In the 1970s and 1980s, of course, you could make even more in cash and bonds.

An income for life + decent bank rates for the rest of your money? Good times for pensioners!

But times have changed. Annuity rates are low. Interest rates are 0% in most countries with relatively stable currencies.

Government bond rates are only yielding 1%-2% per year in many cases.

Stocks, in this environment, are likely to outperform bonds and of course cash.

They have always outperformed long-term, but the gap has increased It is no surprise that they have outperformed so well since 2008, given how cheaply firms can borrow to grow.

Annuities usually don’t offer the same rate of return as drawdown, because the investment provider has to factor in the risk.

Think about it. Why would a company buy your investments from you in return for an income for life, if they didn’t adjust for risk?

You might live until 110, or stocks might not perform as well as before. Most analysis comparing like for like have found that drawdown works better.

For example, if you compare how much Vanguard annuities will give you compared to holding Vanguard ETFs and drawing down, the drawdown usually wins.

If we then accept that drawdown is the better option for most people, then you realistically need to own some stocks.

Inflation will erode bank savings. Bonds won’t cut it if they are 100% of a portfolio.

Real estate can play a part, but it is an illiquid asset and most 80-year-olds don’t want to be running after tenants, maintaining the property, or relying on a management company to do the work.

Therefore, having a combination of stocks and bonds in retirement, and taking out only about 4% of the portfolio over time, is more likely to work than being in fixed income.

Or if people like the perceived security of a fixed income, despite the inflation risk which can only be offset by taking a worse rate, it is possible to use an annuity with just part of the portfolio and drawdown the rest:

How do I invest money in a foreign country?

It depends on what kind of investment you are speaking about. If you want to start a business, it depends on the country.

Some, like the UK, make it easy. You can incorporate on Companies House as a non-resident.

You, of course, don’t need to incorporate i9n every country in this digital world, but some people do incorporate in numerous countries.

If you want to invest in real estate or land, it depends on the countries rules.

Some countries are very friendly towards overseas investors, and some make it illegal to buy land in particular.

The easiest way to invest in a foreign country without all the hassles is to buy a diversified fund or ETF like MSCI World:

If you want something more specific, you can buy regional funds or ETFs like the Asia Pacific ETF.

You can even buy country-specific ETFs like a Vietnamese ETF, or individual shares, even though most non-professional investors should avoid most of these.

In addition to that, you can get direct exposure. For example, if you buy the FTSE All Stars or especially S&P500, you are indirectly getting loads of foreign exposure:

No matter where you live now, I am pretty sure Amazon, Apple, Google, Starbucks and many other “American” or “European” firms are doing well.

Plenty of emerging market firms IPO on the US stock exchange as well, which is one reason emerging market growth has helped the New York Stock Exchange.

So, you don’t need to put your money in country A if you want to invest in country A.

It might be possible to keep your money in country B, but still invest in country A, depending on your current country of residence.

The important thing is just to have a sensible, diversified, long-term strategy.

How has the pandemic affected your investment strategies?

It is human nature to want to be active, but in investing, it is usually much more profitable to have a long-term strategy and stick to it.

My strategy before the pandemic was simple

  • Invest mainly in a diversified range of ETFs
  • Put in lump sums when I have them and also regularly monthly injections
  • Don’t time the stock markets
  • Invest regardless of the news
  • Rebalance from bonds to stock, and vice versa, if there was a big change in one asset class.
  • Not mistaking a loss and a decline as being the same thing. You don’t lose unless you press sell.
  • Invest a small percentage, if needed, into alternative assets, but the core remains the same.

The pandemic came, and such a strategy has worked. Even if markets had taken ten years to recover from the crisis, it would have worked.

What happened wasn’t ’t unprecedented. Markets rose during previous pandemics, even if there was a panic in the middle:

Even during the Spanish Flu, which happened during the same time as WW1, markets did OK. This time they did fine despite lockdowns as well.

And the same thing would make sense if there is another pandemic in 30 years.

Just staying calm and keeping to the same strategy will work. It even worked during a period like the Great Depression, where should a strategy would have broken even in 6–7 years and made good gains within 8–9 years as I mentioned here.

Now of course, it would have been even better had I sold everything one day before the crisis, then put 100% in the Nasdaq at the perfect moment.

That isn’t realistic, though, to have 20/20 vision every time there is a crisis.

People who successful get these things right once, tend to get the next crisis wrong.

Almost everybody I know who sold out of stocks before 2008, and felt smug, then waited too long to get back in, because they thought the rises in 2009–2010 were a dead cat bounce.

The same thing happened this time. Few people predicted the crisis. From the few that did, most are now worse off. They sold at a decent time, but are still in cash!

The exception to the above is business investments. It is true, that in business, people need to pivot and change their strategy over time.

Yet, we can’t compare stock market and private business investments. All the information about stock markets is available to the public.

Private business is different. In private business situations, you can take advantage of these situations more.

Take Covid-19. In the first few months afterwards, Google, Facebook and other ads became cheaper.

Most firms took a “wait and see approach”. Now they are more expensive as everybody wants to do them.

So, being brave in those moments can pay off for busienss owners.

Pained by financial indecision? Want to invest with Adam?

Financial Planner - Adam Fayed

Adam is an internationally recognised author on financial matters, with over 283.7 million answers views on Quora.com and a widely sold book on Amazon

Further Reading 

In the article below, taken directly from my online Quora answers, I spoke about the following issues and subjects:

  • What are some of the simplest rules for investing success, apart from the obvious ones like starting at a young age?
  • What are some of the most effective ways of getting out of poverty? I look at countless aspects such as avoiding vices and debt.
  • Do I worry about post-pandemic inflation, given that the stimulus this time has came on top of an economy which is recovering more quickly than in 2008? I explain why I am not overly worried about huge inflation.

To read more click on the link below.

Add a comment

*Please complete all fields correctly

Adam Fayed financial consultant WhatsApp