How to invest without fear or FOMO
不愿担惊受怕也不想踏空行情？你可以这样投资

Only minutes after I was gloating that my retirement pot had reached half a million pounds last Tuesday, mum called to say dad was knocked off his motorcycle and in hospital.

My pride. His fall. I’ve never read the Old Testament, however I’m pretty sure that is not the way Proverbs 16:18 is supposed to work. A car ran a red light and ruptured his bowel.

Not what you need at 82 years old. By the time I landed in Sydney, my plane was out of scotch and dad was out of theatre. Shit happens, I said to the surgeon. Let’s hope so, he replied.

Only a month after my boat exploded and two years since a lame joke lost me my job, this latest drama underscores the vicissitudes of life. I’m sure readers have their own tales of rapidly changing fortunes.

Please email me and I’ll read them to my patient — but no funny ones lest he pops his staples. The ups and downs of markets is a good topic. Humourless, yet fascinating.

And it’s topical, given the futures data I’ve been following while bedside. For example, it seems few equity investors are betting on small declines in US share prices. The cost of protection against a drop in the S&P 500 is cheap relative to potential gains.

In other words, no one worries about scratching their handlebars, to abuse dad’s accident for metaphors. The extraordinary rise in stocks the world over during the first quarter has pushed bullish sentiment indicators to extreme levels.

At the same time, though, fears of a wipeout gnaw. Consider the Chicago Board Options Exchange’s volatility index, which measures expectations of future volatility in US stocks. The cost of call options (the right to buy the index in future at today’s price) is the most expensive for five years relative to put options (the right to sell).

In other words, markets are betting on more volatility ahead, not less. Either stocks rallying due to interest rate cuts, perhaps, or an artificial intelligence-induced productivity spike. Or crashing, say if inflation returns or geopolitics worsens.

Any of these scenarios is possible. As usual, no one wants to miss out while everyone else is riding off with the wind in their hair. But it is also natural to fear hitting the pavement and eating with a straw.

The problem is easy to solve — in theory. Just sell everything moments before a crash and buy again ahead of the recovery. Back in real life, professional investors use derivatives to protect their backsides while maintaining exposure to the open road.

But institutions have access to the world’s derivative exchanges as well as armies of smart bankers keen to sell them innovative structured products. All for relatively low fees, given their scale.

What about us retail punters, eh? Actually, there are exchange traded funds that have been designed with exactly the twin fears above in mind. These are popularly known as “buffered” or “defined-outcome” ETFs.

Buffered funds hold a basket of customised options in a manner that limits your losses (say to 15 per cent) over a given period (say a year). The catch is that any gains are capped (say to 10 per cent).

You can pick your downside protection. The upside, meanwhile, is a function of market conditions. Interest rates are important. And because these funds earn a premium selling options which they use to buy protection, when volatility is low, so generally is the upside cap and vice versa.

Option prices are sensitive little dears. Upside caps therefore can differ widely as new funds are launched. At the start of 2022, the popular Innovator US Equity Power Buffer ETF had a 9 per cent cap. A year later it was more than twice that.