Tag Archives: nysearcaspy

Stocks Will Go Higher

China-led market volatility has roiled global asset markets, and potentially shaken investors faith in the current bull market. Loss averse investors heading to the sidelines should understand the performance of domestic equities over rolling 10 and 20-yr time periods to avoid missing future gains. This article borrows from recent quotes from famed investor Warren Buffett and stock price information from Nobel laureate Robert Shiller. Market optimism is falling with global share prices, but I want to offer some respite to Seeking Alpha readers. Stocks will go higher. I can not tell you about today, this week, this month, or even the rest of this year. However, as you extend your investment horizon, stocks almost invariably perform. In an August 10th interview on CNBC, Warren Buffett, the famed investor and chairman and CEO of Berkshire Hathaway ( BRK.A , BRK.B ) stated: ” Stocks are going to be higher, and perhaps a lot higher 10 years from now, 20 years for now .” To test his time horizon, I pulled from the long time series of online data that Robert Shiller uses to calculate his famed Cyclically Adjusted Price Earnings (NYSEARCA: CAPE ) Ratio. Below I show cumulative ten-year total returns for the S&P 500 (NYSEARCA: SPY ) and predecessor indices from the Shiller data dating back to 1900. The blue lines are cumulative price returns and the pink lines include dividends. Periods of negative ten year cumulative returns are very limited. The presence of negative ten-year cumulative periods overlapping the tech bubble collapse and the global financial crisis may make myopic investors unduly concerned about the long-run prospects of domestic equities. (click to enlarge) Buffett’s quote first focused on ten-year periods, but expanding a holding period to twenty-years would have only yielded negative total returns (including dividends) in a period that overlapped the 1929 stock market crash and World War II. (click to enlarge) In this interview, Buffett went further stating that “my game is to own decent businesses and decent prices and you are going to make a lot of money over time if you do it, but I think the ability of people to dance in and out of markets is quite limited and in my case is zero.” This statement is consistent with the s tudies linking Buffett’s performance to low volatility equities – he buys businesses that perform through multiple business cycles. Long-time readers know that I am not an unabashed bull, cautioning against the prospect of subnormal returns and increased volatility in my semi-annual market outlook . I also demonstrated earlier this year that equity multiples appeared stretched , including a look at the aforementioned Shiller data. However, if you are uncertain what to do with your domestic stock holdings in these times of heightened volatility, plan to buy high quality businesses on weakness and be prepared to hold these investments for long time periods. If history is a guide, you are very likely to come out a winner. Disclaimer : My articles may contain statements and projections that are forward-looking in nature, and therefore inherently subject to numerous risks, uncertainties and assumptions. While my articles focus on generating long-term risk-adjusted returns, investment decisions necessarily involve the risk of loss of principal. Individual investor circumstances vary significantly, and information gleaned from my articles should be applied to your own unique investment situation, objectives, risk tolerance, and investment horizon. Disclosure: I am/we are long SPY. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Playing Defense With A Chance To Score

Recent historic declines in global markets begs the age old question of how to effectively manage risk/return exposure. Playing defense while still having upside exposure is key. Defined outcome strategies can provide the comfort and relative safety that financial professionals and their clients increasingly seek. The investing world got a rude awakening over the last several trading days. In response to the historic decline, investors will be subjected to a wide range of advice ranging from the banal to the brilliant, but most of it will overlook the simplest solution – choosing the right investment instruments at this juncture can enable investors to pass through difficult times with minimal damage to their wallet or their mind. Most investors have pressure to generate returns while simultaneously avoiding disasters. The problem is that without a crystal ball, the only way to generate returns is by taking on risk. There is simply no way around this. “High return, low risk” products brings out the skeptic in me – trust me, there is risk somewhere within the package that is applicable to the return. If the risk is not well understood or seems too good to be true it may be best to simply stay away. This begs the question: what is the best way to play defense while staying in the mix for gains? In a State Street survey of 420 institutional decision makers , a primary conclusion is that many participants are not protecting their portfolios enough against potential market downturns. Furthermore, when participants do seek out protection strategies, the study finds that they are not exploring the full range of downside protection strategies available to them. One interesting statistic from the study is that a majority of respondents are using dynamic asset allocation, which essentially relies on the strategy getting out of the way at the right moment (perhaps a crystal ball would be helpful here). Another interesting statistic is that approximately 25% of those polled had used hedge funds at some point but no longer do so, which sends a message that the CALPERS decision not to invest in hedge funds going forward may be a trend rather than an anomaly. In recent discussions on these topics, I have heard several advisors propose the use of alternatives to generate returns while protecting portfolios from a crash. A strategy a couple of advisors focused on is Managed Futures due to their low correlation with the market. However, at the same time, there was concern over historically inconsistent performance – so while the odds are high an investor would see increased diversification from them, there is less confidence in generating consistent returns. The quandary for investors becomes how to balance many competing factors. For instance, how should one balance the beneficial low correlation of Managed Futures with inconsistent and ultimately unpredictable performance? Additionally, identifying the right active Managed Future fund – i.e. a manager and approach you trust, is crucial. It seems like a lot of decisions need to be made just right (e.g. right manager, right strategy, right time) to have a shot at an effective solution. Along the same lines, State Street also expresses concerns over too much reliance on investing forecasting skills, particularly when it comes to tactical asset allocation. Defined outcome investing offers a simplified method to participate in equity markets while effectively playing defense. Perhaps I am jaded from 20 years in the industry but one simply cannot get reward without commensurate risk. Defined outcomes clearly define this balance upfront. For instance, our index based strategy looks to limit downside exposure on the S&P 500 to 12.5% on an annual basis. This comes at a cost. We cap the upside at around 15% annually, a healthy return, to pay for the limited exposure down. Thus, the risk/reward equation is clearly spelled out. If the market drops materially like in 2008, you are spared the heartache, taking a minimal relative loss and nicely outperforming. If the market moves up strongly like in 2013, you will underperform but still generate a respectable mid-teen return. It is clear, consistent and provides investors the clarity they deserve. With an increasing abundance of market uncertainty, we believe that defined outcome strategies can provide the comfort and relative safety that financial professionals and their clients increasingly seek. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

How To Invest As Fear Is Thrown Into The Market

Summary As fear increases in the market, volatility has rapidly risen in one of the shortest timeframes on record. Traders betting on a normalization of expectations should position for an eventual decline in volatility. Investing alongside the impact of contango results in the best returns. Investments never consistently trade in a single direction forever. Over the past week, the crash of major stock indices has been a stark reminder that surprises to investors can happen very quickly and that fear itself can often prove to be a powerful force to be reckoned with. Yet potential opportunities exist in every situation. One such trade to now consider is the eventual suppression of uncertainty as the stock market once again normalizes and regains its composure. Over the last few days, volatility has very rapidly been increasing as a result of this uncertainty. This can be seen in the graph of the Volatility S&P 500 Index (VIX) found below as compared against the S&P 500 represented by the SPDR S&P 500 Trust ETF ( SPY ) . The VIX is quoted in percentage points and roughly equates to the expected movement in the S&P 500 index over the subsequent 30-day period when annualized. The index is a largely constructed by utilizing the implied volatilities of a wide range of S&P 500 index options. In general, the VIX represents the expected swing of the market in either direction as an expressed percentage over a given period of time. Since trading at a low of $13 on Monday, August 17, the Volatility S&P 500 Index soared to a closing price of $28 on August 21. This is greater than a 100% rise over the course of days, and therefore represents one of the most sudden movements recorded in the index’s history. It also reflects the high degree of uncertainty in the market as investors scrambled to buy options in order to gain protection for their investments. Yet as it often tends to be the case, fear and uncertainty naturally subside over a given course of time. Historically, this too can often unfold in a very rapid manner. As noted in the graph below, the VIX frequently spikes only to rapidly return back to a more sustained level in the mid-teen price range. Reasonably, this allows for a trader to predict and to invest into the normalization of market uncertainty by positioning for the eventual decline in the VIX. While investors can directly invest into the VIX through the utilization of call and put options, those unfamiliar with the use of these trading tools can still capitalize upon this predictable trend. One such investment method is to consider a short position in a related fund that is correlated to the VIX. For example, the iPath S&P 500 VIX Short-Term Futures ETN ( VXX ) is an exchange traded note that offers exposure to the daily rolling long position in the first and second month VIX futures contract. Yet as a consequence of contango, the VXX is almost inherently designed to decline in value. Contango occurs due to the perishable value of the premium attached to futures prices set before the expected delivery date. As a consequence of contango and the reliable trading action of the VIX itself, the long-term trend of the VXX is made abundantly clear in the graph shown below. Over the long-term, contango and the lack of a consistently fearful market typically dictate the downward trend of the investment. As seen in the graph below, such a trend has been well defined for many years. (click to enlarge) However, not everyone is capable of entering into a short position. There is also an inherent danger as the potential losses of a trend that backlashes against expectations are theoretically limitless. Therefore, investors could alternatively go long a VIX inverse investment such as the VelocityShares Daily Inverse VIX Short-Term ETN ( XIV ) in order to capture a similar trend. This investment seeks the inverse performance of the S&P 500 VIX Short-Term Futures Index. For those wanting to limit the volatile nature of the this long position, one can also consider the VelocityShares Daily Inverse VIX Medium-Term ETN ( ZIV ) . This investment seeks the inverse performance of the S&P 500 VIX Mid-Term Futures index. The difference between these two futures indices is that the short-term index utilizes the prices of the next two near-term futures contracts whereas the mid-term index utilizes the prices of the fourth, fifth, sixth, and seventh month future contracts. As a result of this, the mid-term index faces significantly less volatility and a reduced impact from contango. The resulting trends of each of these investments can be found in the comparison graph below. While both XIV and ZIV have historically trended higher, it is clear that traders seeking higher returns are more prone to invest into XIV following a deterioration of the upward trend, which occurs when increased fear returns to the market. Final Thoughts It is important to remember no one is capable of predicting the future with perfect accuracy. As such, both traders and investors should often consider utilizing multiple entry points in order to average down into a comfortable position. Just because fear and volatility have risen to a very high point in a limited amount of time, there is no reason to believe that it will not be able to continue to rise in the days and potential weeks to follow. Nevertheless, for the patient investor capable of identifying opportunity when it passes by, the potential return from a predictable trend found in volatility can often be quite rewarding. After all, the odds of a market that continues to consistently become ever more fearful is rather slim statistically. Disclosure: I am/we are long XIV, ZIV. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.