[d333gs]

Hi, like most of you, my portfolio got hit. I am a Canadian living in France and have a money manager taking care of my CDN portfolio. I got worried about this correction end of February but my MM was complacent and, as far as I am concerned, sat on the tracks and just let the train hit. I am not happy.
I started doing a bit of research to see what could have been done besides selling everything and found two possibilities:
One was to use an options collar on the holdings I was worried about and the other was to 'Short the Box'.
If I understand this correctly this means shorting the stock you own by the same number of stocks you own.
Example: Short 100 shares of BMO at $70 if it falls down $37 you still have a $70 value: $37 stock price plus $33 cash.

Do any of you have experience doing this? Are there any tax ramifications when covering your short?
Any opinions would be highly appreciated.
John

 

[Money172375]

I think most managers would recommending holding firm unless your personal situation has changed. Shocks like this are much more tolerable when our asset allocation meets our goals and risk tolerances.....unfortunately we often realize we are more risk averse when markets fall to the degree they have. The was a fast and unpredictable “train”....don’t think most managers would have done anything.

is this a full serve discretionary MM?

sorry...can’t comment on the short alternative......I tend to only stick to strategies and products I fully understand.

good luck!

 

[nobleea]

If you are worried about it, why not just sell? Wouldn't you be further ahead than some shorting strategy? With your short the box strategy there is no downside, but also no upside. That is, you are stuck at $70 regardless of what happens. Same as if you were to sell in to cash. Except your broker makes some extra money on the short. I think you're also responsible for dividends when shorting.

 

[d333gs]

If you are worried about it, why not just sell? Wouldn't you be further ahead than some shorting strategy? With your short the box strategy there is no downside, but also no upside. That is, you are stuck at $70 regardless of what happens. Same as if you were to sell into cash. Except your broker makes some extra money on the short. I think you're also responsible for dividends when shorting.

Stuck at 70 would have been good! I am looking for a way to preserve value without selling off the portfolio. When things quiet down, then cover the short. Re dividends, yeah, I was wondering about that. Thanks for the input

 

[doctrine]

I think this is the first I've heard of shorting the stocks you own. I wonder if anyone else has feedback from doing this.

It strikes me as likely more expensive than options though, and I'm sure some people here can comment on it. For shorting, you would lose both the dividends and you would have to pay capital gains on the drop in share price. You would also lose on borrowing costs to borrow the shares. Over 3-6 months, this could be substantial. I would think that buying puts would be cheaper, depending on the pricing. You should be able to estimate the costs of both for say a 30% drop in share price. If the stock does drop, you can settle the option but still keep your shares.

 

[james4beach]

It is indeed possible to open an offsetting short position against stock holdings. An example would be, if you hold a portfolio of securities, you can short XIU which is cheap to borrow, so it's easy to short without much cost. This reduces your net exposure to the TSX, by shorting something highly correlated with your stocks.

But I think that kind of misses a bigger point... that would be a very convoluted thing to do. I do not think your money manager will pull this off. They will also have to decide when to cover the short. This is a bad idea. It adds complexity for no good reason, and does not improve your circumstances.

d333gs: money managers are not clairvoyant. They can't time the stock market any more than anybody else can. You should not expect them to manage or reduce losses by doing something strategic... this generally can't be done by anyone!

Instead, I think you should focus on deciding your stock/bond allocation mix. And this absolutely is a conversation you should have with the advisor! The question is: what is the stock/bond allocation which is right for your risk tolerance?

Let's say you previously were 80% stocks 20% bonds. It seems you were uncomfortable during the market crash. This tells us that this 80/20 mix is not right for you. Instead, maybe you should be at something like 50/50 ... more conservative.

That's the kind of conversation I think you should have with this advisor, immediately. This does not involve "selling everything". Rather, it's a change to the current asset allocation plan. This is all terminology that your advisor should know.

Here's how I suggest starting. First learn what your current asset allocation (% stocks, % bonds) is. Then say to them: now I know this is too aggressive for me. I need a more conservative asset allocation.

 

[james4beach]

To help you decide your asset allocation, here are the charts (with the worst % drop since start of 2020) for a few different allocations so you can visualize them. Click each for the chart.

• VEQT is 100% stocks, low was -27.5%
• VGRO is 80% stocks, low was -22%
• VBAL is 60% stocks, low was -18%
• VCNS is 40% stocks, low was -15%

You can see the relationship. 40% stocks was the smoothest ride. Yes, it still fell, but not as badly as higher stock allocations. You have to decide where on the risk spectrum you want to be.

No short selling or options are needed.

 

[d333gs]

I think this is the first I've heard of shorting the stocks you own. I wonder if anyone else has feedback from doing this.

It strikes me as likely more expensive than options though, and I'm sure some people here can comment on it. For shorting, you would lose both the dividends and you would have to pay capital gains on the drop in share price. You would also lose on borrowing costs to borrow the shares. Over 3-6 months, this could be substantial. I would think that buying puts would be cheaper, depending on the pricing. You should be able to estimate the costs of both for say a 30% drop in share price. If the stock does drop, you can settle the option but still keep your shares.

To help you decide your asset allocation, here are the charts (with the worst % drop since start of 2020) for a few different allocations so you can visualize them. Click each for the chart.

• VEQT is 100% stocks, low was -27.5%
• VGRO is 80% stocks, low was -22%
• VBAL is 60% stocks, low was -18%
• VCNS is 40% stocks, low was -15%

You can see the relationship. 40% stocks was the smoothest ride. Yes, it still fell, but not as badly as higher stock allocations. You have to decide where on the risk spectrum you want to be.

No short selling or options are needed.

Thank you James for taking the time to respond, Those ETFs are new to me , very interesting indeed .
John

 

[james4beach]

Thank you James for taking the time to respond, Those ETFs are new to me , very interesting indeed .
John

Maybe I should add, I just used the ETF for illustrating the difference in risk / volatility. You don't have to buy these ETFs. But they do a good job at showing how a typical stock/bond allocation responds.

 

[d333gs]

Maybe I should add, I just used the ETF for illustrating the difference in risk / volatility. You don't have to buy these ETFs. But they do a good job at showing how a typical stock/bond allocation responds.

Absolutely, very good illustrations

 

[d333gs]

I should say my mention of the MM is a bit of a distraction in this thread. And you may have guessed by now that I am not 'in the business' .
My real interest is in a strategy to neutralize a stock for the short term.

Here is investopedia's description of Short Sell Against The Box.
They are a US site, I was looking for CDN tax implications.

Short Sell Against the Box Definition

A short sell against the box refers to the act of short selling securities you already own, leaving yourself neutral, with stock gains and losses being equal.

www.investopedia.com

I found this interesting: "The typical fee for a stock loan is 0.30% per annum. In case of short supply, when many investors are going short on a stock, the fee may go up to 20-30% per annum. "

Short Selling and Stock Borrowing Costs - Finance Train

Short selling refers to the process of selling a security not owned by the investor with the intention of buying it back at a later date at a cheaper

financetrain.com

Here is a link to a description of the Collar options possibility :

https://www.m-x.ca/f_publications_en/strategy_collar_en.pdf

 

[d333gs]

I think this is the first I've heard of shorting the stocks you own. I wonder if anyone else has feedback from doing this.

It strikes me as likely more expensive than options though, and I'm sure some people here can comment on it. For shorting, you would lose both the dividends and you would have to pay capital gains on the drop in share price. You would also lose on borrowing costs to borrow the shares. Over 3-6 months, this could be substantial. I would think that buying puts would be cheaper, depending on the pricing. You should be able to estimate the costs of both for say a 30% drop in share price. If the stock does drop, you can settle the option but still keep your shares.

Thanks Doctrine , I posted some links below.

 

[:) lonewolf]

d333gs The MM should have a method that gives an edge plus black & white parameters of when to stand a side, buy & or sell. Truth be told you are the real money manager of your account.

 

[james4beach]

I should say my mention of the MM is a bit of a distraction in this thread. And you may have guessed by now that I am not 'in the business' .
My real interest is in a strategy to neutralize a stock for the short term.

I think the problem, as you pointed out, is the cost to borrow the security short. This cost varies and is not easy to figure out. Maybe you should ask your brokerage if they charge a fee to borrow securities short.

You will also find that tax reporting is very tricky for short sales. A friend of mine recently got audited for some short selling. I've been looking into this issue for years, and have never figured out the "right way" to report this in taxes.

I see you are looking at options strategies, but there are a lot of moving parts there. That's going to be pretty complex to figure out. Is it really worth all this effort? If you don't want to be holding the stock, it seems to me you'd be better off just selling it. You can buy it back any time.

 

[bgc_fan]

I'm just going to throw this out there, but I took a quick look at my portfolio, a mixture of stocks and index MFs. Overall, I'm probably down about 5% from the start of the year. I'm not saying that's great performance, but more of the general idea that most of the market has recovered from the drastic lows of last month. If I were to have changed my investment philosophy and sold with the intent to buy back when the market hit bottom, I would still be holding cash and lost all the recovery. Likewise, depending on when you wanted to short the stocks during that downturn, you could have ended up losing due to the recovery.

Of course, there may be another dip in the market when the earnings start coming out and the reality of the economic slow down hits, but that's another story.

 

[james4beach]

I am looking for a way to preserve value without selling off the portfolio. When things quiet down, then cover the short. Re dividends, yeah, I was wondering about that. Thanks for the input

Revisiting this old question, perhaps another (simpler) way to "insure" your portfolio against declines, at a time you're worried, is to buy TAIL ... see

Stock investing with black swan protection

It's not a precise hedge, but could still do the trick, and is simple to do. Your original positions are left alone and you can hold TAIL for the period you are worried.

 

[d333gs]

Revisiting this old question, perhaps another (simpler) way to "insure" your portfolio against declines, at a time you're worried, is to buy TAIL ... see

Stock investing with black swan protection

It's not a precise hedge, but could still do the trick, and is simple to do. Your original positions are left alone and you can hold TAIL for the period you are worried.

Looks interesting, Thank you!