Managing Risk

Memphis Depay's injury yesterday saw him drop from £4.80 to £3.64 (-£1.16 / -24.1%) in less than 24 hours.


Memphis Depay is set to miss EURO 2020 with what is believed to be an ACL injury

This is one of the largest price drops we have seen for some time and this highlights the risk in holding too much of one player, especially when they are at a very high price and have future positive factors very much built into their very high price.


Risk is not always a bad thing as often with higher risk there can be higher rewards. The amount of risk a trader is happy to take when trading will of course depend on them individually and so the below advice is only relevant to those wanting to manage a lower risk portfolio and of course this is not always the best way to trade, but, is often a safer way to do so.


Diversifying


The first and most common point made in regards to managing risk is to have a diverse portfolio to spread risk across different players. This is advised by many traders so that if one player drops significantly in price, it will not have too much of a negative affect on the total value of your portfolio.


It is important to note that to diversify your portfolio, you should spread the total value of your portfolio across different players and not the total cost of your portfolio across different players.


Key points on having a diverse portfolio to spread risk

  • Avoid having any one player take up too large a percentage of your portfolio's total value

  • Buy players with diverse player characteristics such as different positions, ages, prices, teams, nationalities etc

  • Buy players which could fit different upcoming market trends

Pros of having a diverse portfolio:

  • Minimizes risk as if one player drops, your total portfolio value will drop less as a percentage, the more diverse your portfolio is

  • More players to potentially benefit from selling for capital appreciation - Football Index is a volatile market and you may be able to sell those who rise for a profit whilst keeping those who do not rise more regularly


Cons of having a diverse portfolio:

  • More players to manage - may need to keep an eye out on more player's prices / performances and make the necessary changes

  • Opportunity cost - could miss out on better profits if choosing to diversify rather than buying a higher percentage of the players you are most confident in


Overall, the extent to which you choose to diversify your portfolio will depend on many factors, but, to minimize risk - it is certainly wise to have a diverse portfolio. If you concentrate on buying players where there is less risk they will drop in price, arguably there is also less need to diversify.


Below are considerations to make when judging how risky a hold is.


Price


The greater the difference is between a player's IPO price and their current price, the more a player could potentially drop in price.


Buying Anthony Gordon at 15p (Currently trading at £1.43) and buying Dejan Kulusevski at 35p *highlighted in a FIC blog at 92p (Currently trading at £2.34) were very low risk purchases I made last season as both were only just above their IPO prices. This meant the potential downside was considerably lower than the potential upside.



Unfortunately, I sold both painfully too soon. But, the important point here is that some players have a considerably higher potential upside than potential downside. When a player could potentially drop in price considerably, they are often more risky.


It can be very useful to question what factors are already built into a player's price when considering how risky buying a player is, especially when they are a higher priced player.


What factors are built into their current price?


Looking at a player's price graph and considering why the player has risen in price can be useful to consider what factors are built into their current price. For example, Memphis Depay has increased in price considerably over the last 6 months and his price rose even more dramatically between late October and early November due to the dividend announcement and strong EURO 2020 players very much being the dominant factors influencing the market.


Therefore, it is no surprise to see his price drop back down to what it was in late October as a lot of the money that went into him for EURO 2020 has been pulled back out as he is unlikely to feature at this tournament.




Factors which could be built into a player's price:

  • EURO 2020

  • Transfer Speculation

  • Recent high PB scores

  • Influential market trends

Age


Older players will inevitably drop in price as they get closer to the age of no longer potentially earning dividends. Either by moving to play in a non-pb league or by retiring altogether. Some older players will rise in price, but, when the positive factors that lead to traders buying the player start to fade, the drop can be large and sudden too.


Santi Cazorla, for example, recently hit £1.12 due to the positive factors of EURO 2020 and the time he had been recently hitting high PB scores. These two positive factors were very influential towards the end of October which saw his price so much. His price has since dropped, unsurprisingly, to 75p (-37p / -33%).



Older players drop more quickly when positive factors that influenced their price rise start to fade

This can also work the other way with younger players who become over-inflated in price mostly due to hype and trends.


Who are the least risky players to buy?


To conclude, there is an element of risk in buying any player on Football Index and to minimize risk you can diversify your portfolio. As long as you are buying many more players that increase in price than players that drop then you do not need to worry about the occasional player that drops in price.


The players highlighted in Football Index Club blogs tend to be fairly low risk as a lot of research goes into highlighting players and the top end, higher priced players or players who could be at a temporary peak price are generally avoided. Below are some key stats on the players highlighted in Football Index Club blogs over the last 3 months which shows this:


  • Only 12 players out of 195 players have dropped 15% or more since being highlighted.

  • Meanwhile 70 players out of 195 players have increased 15% or more in price with many increasing considerably more

  • 36 players have increased 30% or more

  • No players have dropped 30% or more.

Alongside Football Index growing significantly as a whole and considerable research leading to better results, one of the most influential factors which helps decide which players are highlighted is this:


Is this potential upside much greater than the potential downside?


Often the answer is yes and over time, the players highlighted grow as their strong performances lead to more demand as traders start to see potential value given their potential to earn dividends.


Some of the players highlighted in blogs focusing on strong performers in recent games have decreased since. This further suggests that 'Recent high PB scores' can be temporarily built into a player's price and unless you are confident they will continue to hit high PB scores or the player's price has not already increased due to high PB scores - it can often be best to avoid players that temporarily rise due to strong performers in the short term. Younger players that are not already at too high a price with a massive upside potential can often be exempt from this as over time they are likely to replicate their strong form.


Players which are currently less risky:

  • Players who have the potential to return a considerably high percentage dividend yield

  • Players that have not increased in price based purely on strong PB scores and have many other longer term positive factors built into their price (Some Youth players are excluded from this)

  • Players that are not at the very top end of the market - These players are often more likely to earn dividends and have the potential to grow massively alongside Football Index. However, an injury or poor form often influences their price massively.

  • Players which are fairly young and have proven they have strong potential to earn dividends

  • Players that get regular game time

  • Players close to their IPO price

Throughout the rest of the month, plenty more younger players and players with strong transfer speculation and who therefore have a greater potential upside than potential downside will be highlighted on the site throughout various blogs.





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