I’ll let you read for yourself. There are many other articles along the same idea. My memory was likely off on the $790 figure. Looks more like $850-$950.
Answering both your posts, yes ‘individual circumstances’ includes changed personal tolerance for risk, that’s in fact mainly what it amounts to. Personal perception of how much risk there is in the market…there I think it strays back into assuming one has insight that others don’t about the market, which is a fundamentally unsound assumption for the great majority of people.
On the VIX, stock market return is weakly if at all auto-correlated. Volatility is strongly auto-correlated, ie lots of volatility recently is a predictor of more to come and vice versa, though obviously the auto-correlation couldn’t be 100% or volatility would never change. Long story short, the VIX has significant predictive power of future volatility over its natural horizon, one month (it’s a measure derived from the prices of S&P options of one month maturity). And one year is a piece wise function of one month periods, etc. So, there’s an argument to be made that risk could or should be modulated according to the VIX. IOW 50% stocks, 50% bonds isn’t the same risk when the VIX is ~10 as now as it is when the VIX is 50+ as in periods of the 2008-9 crisis and perhaps allocation should take this into account. Like I said, there’s room for argument on that point. A typical individual investor who says ‘skip the complexity, I’ll stick with a fixed % stocks that only changes with my circumstances’ will get no strong argument from me.
Trading the VIX to raise return is a different issue. The basic issue with instruments like VXX is that they invest in VIX futures, there’s no way to invest directly in the VIX. VIX futures are usually in contango, meaning the futures price is higher than spot. If all remains as is the futures price comes down to the spot VIX level and the long loses money. In fact one theory of investing is to put a very high % in safe assets and short VIX futures for the rest. That will provide a steady income most of the time ‘riding’ the contango of the futures curve, blow up in your face then the VIX spikes time to time, but the large % in safe assets covers that. Anyway there’s no effective hedge of anything that’s free. The general expectation from hedging a market drop by being long VIX futures is losing money most of the time, similar in principal to continuously buying out of the money put options on stocks: all the times the market doesn’t crash it costs you the premium.
There’s nothing wrong with speculating on anything if you realize you have no advantage, which means it should probably be relatively small amounts for fun. Speaking generally, no way to know which given disembodied voice on the web is among the few people who can actually make money consistently on their hunches from an individual investors’ perch. But the number who think they can greatly outnumbers those who actually can. And again if one isn’t foregoing a lucrative career as a professional trader or money manager because of a lack of self confidence (which would indeed be unfortunate), there’s much less downside to an average investor from underestimating their trading abilities and going with buy and hold than there is from overestimating them.
I diversified & re-balanced.
I will sit tight, & try to switch to bonds if things get weird.
Okay. Thanks. But not seeing a convincing consensus there.
The first one just claims it’s better to buy in early January, mid-March, early April, and early July, on average.
The second is a guy who says other analysts and prognosticators who predict gold going up are wrong and mainly because of chart shapes and because stock markets are bullish and gold functions as a “fear asset”, so expect it to go down to 890 by the end of 2017 … of course since he made that prediction, about two months ago in the midst of dropping gold prices (from 1304.89 to it looks like about 1160ish when he was writing), gold bottomed out at 1128.90 and is now up to 1233.55 in a 6 to 7 week run up of over 9%. And that’s in a time when VIX as a marker of fear says there is little being felt by investors. (Chart used.)
The third liked gold at 1150 while writing in December, about the same time the last guy was saying plan on 2017 being a bear season for gold. It had seen its bottom according to him.
Which to believe?
Corry in general I agree with your take about buy and hold and keeping the speculation as a small portion for fun. Still the contrarian in me is always attracted when something is trading at historic lows and if it seems that that something is unlikely to drop much lower and has significant potential to go back up … a relatively small amount is fun. In this case I do think the market’s confidence that it will stay extremely non-volatile is misplaced. If the market does go up my 59.4% equity stake will have me happy about it. But if there is a crash that 0.6% portion in VXX (along with the 6% in gold and the 36% in fixed income instruments) will give me something to put into the market
I rebalanced last spring, before Trump even had the nomination sewed up. I figured the market would be turbulent no matter who won, and I would be needing most of that money in the medium term (<5 yrs). I’m not getting much out of the current boost in the market, but I sleep a lot better at night.
I pulled 75% of the money in my retirement account out of the aggressive stock market account and moved it into three different conservative bond funds for now.
And OTOH
FWIW.
frankly, the last thing you want to be in is bonds. Interest rates have no where to go but up, which means bond prices go down. Short term bonds is one thing, but longer term is not a very safe conservative investment.
Me, I’m going more cash/short term liquid assets.
Whoever wrote that is incorrect. It isn’t a matter of opinion but well settled from research that short term recent future stock index volatility has significant predictive power for short term future volatility, relative to the predictability of short term future return from recent return which is almost nil. It’s not just a matter of the VIX futures. The same thing can be demonstrated analytically and over horizons greater than a month though not long term. The writer is confused or writing for an audience confused about the difference between statistically significant predictive power and a crystal ball. The spot VIX is 10.85. Of course it’s sure almost sure to be ‘wrong’ if ‘wrong’ as defined as any deviation of the next month’s realized annualized std dev of return from 10.85%. But there’s much stronger than a random relationship between next month’s realized vol and 10.85. Which is again in contrast to next month’s return as a function of last month’s, which have a much weaker relationship if any.
Your reasoning isn’t obvious IMO even if your first paragraph is true. Let’s say for argument’s sake one has any personal income stream and have a unique insight that it’s now going to be lower than they previously thought. To reach a given level of retirement income they either have save more or take more investment risk in what they save (income streams like SS or a pension, or income from a job, are not investments). Or they could save no more, take no more risk, and adjust their expectations down. Or they could take less investment risk and lower expectations further. But the investment mix is really orthogonal to the personal knowledge that income streams will be lower or are themselves more at risk. The risk allocation on investments comes back to risk tolerance and there isn’t a direct logic why that would be affected in one particular direction by knowledge about income streams outside the investment portfolio.
And I don’t agree with your view about the relationship of who wins a particular election and fundamental long term problems like how to fund public old age pensions (SS in the US) in aging population or some state’s particularly badly underfunded public employee pension liabilities. Those questions will be settled politically over time. But seems to me it’s more likely the position of parties will change to what might be workable consensus than that the consensus will somehow change just depending on which party wins, and again especially just one election…these are multi-decade problems.
For example, if the idea is that there will be a national consensus for states which have kept their finances in order to bail out states which haven’t, IMO one can state free of party affiliation that’s not going to happen. Nor will restraints on trade or movement of people among US states will be imposed, so the states with poor finances, generally ones with already high state taxes, will only be able to raise them so much further without reaching a tipping point of businesses and better off taxpayers leaving in large numbers especially over time and again it’s multi-decade issue. If within that constraint they can’t pay all the pension benefits they promised, then they won’t. Outlawing bankruptcy can’t make money magically appear. But maybe they’ll muddle through. Anyway a state employee in a high tax poor finances state (like say IL or mine, NJ) is probably reasonable to view their pension as less than a sure thing. But that didn’t somehow change last November. It was already true, and will still be true going forward even if the party label of the national winners is different.
All of this is pragmatically true but I’d like to nitpick your phrase “states which have kept their finances in order.” Some states such as California are not in great shape financially and also have high taxes and so can’t raise them much higher, but are actually net donors to the federal government: the last time I checked, if California were not a donor state they would approximately have a balanced budget. The phrase “kept their finances in order” implies blame directed toward the states with budget issues, which granted like I said does not alter future events.
It seems to me that risk tolerance is often very closely related to whether or not one feels that one’s basic needs are assured of being met or not.
It is pretty easy for me to have a higher than average risk tolerance since I can be confident that I will have a roof over my head and food on the table, a nice roof and good food, pretty much no matter what happens in the markets. Someone who is worried that a loss threatens those basic things, or more realistically, threatens to significantly impact their expected and accustomed to standard of living, will have less tolerance for risk. If I suddenly was not as sure that my current employment was a sure thing to continue for as long as I want to do it and/or thought that it might suddenly produce a fraction of the income that it now does, I might not be as willing to take the same degree of risk.
This is not something that only happens with investments, it happens with careers as well. A new college graduate who comes from a wealthier family is more likely to take a chance with less stable new company or starting a business because they know that if it collapses underneath them they won’t end up on the street. Family will have their back and they will be able to take another swing at the bat if the first swing, or two, whiff. So first pitch is a bit more likely to swing for the fence, and sometimes hit it. No such family resources to rely upon and the risk tolerance for taking those chances often drops in favor of the more steady job.
As to VIX … first off sorry I forgot to drop in the link.
I think that the “risk” that you are referencing is just different than the “risk” that many of the rest of us care about. It reminds some of what happens in the medical literature, the difference between having a finding that is statistically significant and one that is clinically significant
Wall Street hates uncertainty, and the current White House occupant is (charitably) highly erratic. I think we’ve seen about as much of the “Trump is a businessman, so things are going to be good for business” run-up as we’re going to, mostly as a result of decent earnings reports from the quarter before he took office.
Again, no matter how much the Right says so, this was not a normal election, not a normal result, and Trump is not a normal office holder. Things are very unsettled right now, and the trend is currently toward more chaotic rather than less. I can’t see the market holding strong for much longer, and I suspect it’s going to be a steep fall when it comes.
I’ve got a lot in cash right now, but it’s not going to sit there long. If things crash hard and it looks like impeachment will happen, I’ll probably buy back in cautiously. Otherwise, it’s going to go into CDs until the next administration.
I’ve always held some international funds. I’ve sold off about half my US based portfolio and will dump my growth equity fund and a couple of more stocks, keep the international funds and a couple of consumer product companies that Trump can’t hurt too badly.
If I were really greedy and could live with myself for doing so, I’d buy military manufacturing stocks. I’m sure they’ve already had a big run-up, but I’d look into them. (I did buy oil stocks in late 2000 when Dubya was elected. Made money doing so, but it made me feel dirty.)
US dollar denominated bonds are way too risky now that interest rates are so low. Instead of gold, Swiss, German or Japanese bonds might be interesting. If you trust the underlying currency, it’s like buying gold except there are no storage fees and you earn a bit of interest.
If trump starts rattling swords, I might even consider buying some gold stocks, but I’m not keen on them normally and would not buy metal.
One thing that might slow down a Trump impeachment is the guy waiting in the wings. Pence is horror show in his own right. And if the election of both is somehow deemed fraudulent, Ryan and McConnell are exactly good choices either. We’re in deep dodo.
I want to re-iterate the point about bonds. It’s just not how much interest they are generating but what you can sell them for. They should provide a certain amount of income as long as you hold on to them. The issue is what happens if you need to sell them in a few years? You can easily take a big hit on the value if interest rates go up. And, as noted, they basically can’t go down so you’re not likely to “win” if things go the other way.
So you need to think about bonds in terms of holding them for the entire period. Right now it might be better to go with short term (5 year) than long term due to what might happen with inflation.
Senator McConnell isn’t in the Presidential Line of Succession.
The expectation of which is to no small degree priced in. Schwab has a good analysis of it.
And OTOH bond values may increase or at least be relatively spared if stock values drop.
They usually are, and bond beta runs about a third of what stock beta does. And bonds can almost always be counted on to return the stated interest, and even in the event higher interest rates make the market value fall relative to face value, will, if held to maturity, return to the original face value. I keep around 30% in bonds although I’m pretty far into my sixties. Younger people can be a little more aggressive. I’m in the Vanguard Total Bond Market Index, VBTLX, which has an average duration of 6.0 years, so not too long a time frame. 85% of the bonds in the fund have a duration of less than 10 years, and 45% have an effective maturity less than 5 years.