5 ways to benefit (or protect yourself) from Euro problems

on Monday, 26 November 2012. Posted in ,
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A ‘HOW TO’ GUIDE

42-15180781In our last article we discussed the problems of Europe.  If we are correct, and Europe is doomed, what can the average person do to protect their investments first, and possibly even make money from the crisis?

Here are 5 ideas.

Don’t hold Euros

Firstly, don’t hold Euros or Euro assets unless necessary.  The currency is very likely to fall in a crisis.

Borrow, cautiously, in Euros

Secondly, its fine to borrow in Euros since its value might fall, which is attractive if you earn in RMB or USD.  A word of warning however; do make sure that you debt levels aren’t too high compared to the value of your house (or security).  In a true Euro crisis banks will have problems and may start to call the “higher risk loans” and you don’t want to be part of that group.

US Treasuries

Thirdly, the asset of choice in a crisis is US treasuries, so consider these when the end is looking close.  A word of warning on these assets also.  US treasuries aren’t cheap right now.  Their yields across many maturities are very low already so there is no rush to get into these securities unless the train wreck appears imminent.  Or just hold USD cash.  Swiss Franks, due to their commitment to peg their currency to the Euro, isn’t quite the safe bet it once was.

Short Funds

Fourthly, for the slightly more confident – is to buy a short fund, exchange traded of course.   All you need is a share or brokerage account with access to the United States* and you too can make money when the market falls.   Short ETFs rise when the market falls, since the fund consists of short positions and derivatives that make money in that scenario.  It’s easier than trying to figure out how to short sell (and in parts of Europe, short selling is plain impossible anyway) and its far less tricky than managing derivative positions.

So what exchange traded funds should I buy? 

Firstly, Short European stocks ETFs like Proshares Ultrashort Europe (EPV) or you could buy a fund that specifically shorts financial stocks, such as ProShares UltraShort Financials (SKF) or Direxion Daily Financial Bear 3X Shares (FAZ).   Or you could simply buy a short Euro currency fund like ProShares UltraShort Euro (EUO) or Market Vectors Double Short Euro (DRR).

Use Short Funds with Care

Keep in mind that many of these funds are leveraged, on steroids if you will.  They are designed not just to do the opposite of the index, but the opposite X2 (in the case of ‘Double Short’) or three times (in the case of ‘UltraShort’).  For this reason they should be used very cautiously.  They can win bigger and lose bigger too.  Also, keep in mind that the long term trend of all stock-markets is up, so you will be betting that long term trend will be broken in the short term.   This is not a strategy for the core of your retirement savings.  If you don’t have the time to manage your holdings, just stick with strategy one and maybe strategy three.

*We like Interactive Brokers or Capital Platforms in Hong Kong, or Internaxx in Luxembourg.

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