Portfolio Hedging with VXX

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Risk aversion is high and sentiments bearish. Markets are pricing in the risk of contagion in europe as Spain just saved a local bank. War creates more fear as tensions are arising in North/South Korea and Iran/Israel with US military increasing their prescene in both region. 

One of the ETF to consider for portfolio hedging in times of volatility is VXX (the short-term futures ETN for VIX). If it crashes, this one is a potential >50% gain (though those who bought in March/April would have already gotten 100% ..

If it doesn't, the portfolio value will go up and VXX goes down .. but will likely negate and breakeven.

This trade is more for those who like to keep the portfolio intact and collect dividends but want to offset some of the losses if the market do crash.

More information can be found at http://www.ipathetn.com/VXX-overview.jsp



Some related articles about VIX by other traders/investors.

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• You Can Cash In on Volatility (fool.com)
• Revisiting my VIX trade (investmentpostcards.com)
• How to Play the Market Plunge (online.wsj.com)
• I have just hedged my equities by going long volatility (investmentpostcards.com)

JOKE - The Best Definitions for Market Terms!

Image via WikipediaA fun email circulating trading desks, worthwhile as an informal measure of sentiment:

CEO --Chief Embezzlement Officer.

CFO-- Corporate Fraud Officer.

BULL MARKET -- A random market movement causing an investor to mistake himself for a financial genius.

BEAR MARKET -- A 6 to 18 month period when the kids get no allowance, the wife gets no jewelry, and the husband gets no sex.

VALUE INVESTING -- The art of buying low and selling lower.

P/E RATIO -- The percentage of investors wetting their pants as the market keeps crashing.

BROKER -- What my broker has made me.

STANDARD & POOR -- Your life in a nutshell.

STOCK ANALYST -- Idiot who just downgraded your stock.

STOCK SPLIT -- When your ex-wife and her lawyer split your assets equally between themselves.

FINANCIAL PLANNER -- A guy whose phone has been disconnected.

MARKET CORRECTION -- The day after you buy stocks.

CASH FLOW -- The movement your money makes as it disappears down the toilet.

YAHOO -- What you yell after selling it to some poor sucker for $240 per share.

WINDOWS -- What you jump out of when you're the sucker who bought Yahoo @ $240 per share.

INSTITUTIONAL INVESTOR -- Past year investor who's now locked up in a nuthouse.

PROFIT -- An archaic word no longer in use.

Warren Buffett's Investing Checklist

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Warren Buffett's Investing Questions

Before Warren Buffett invests a dime, he asks:

• Is the company in an industry with good economics? That is, is it not in an industry competing on price?
  
  
• Does the company have a consumer monopoly or brand name that commands loyalty?
  
  
• Can anyone with an abundance of resources compete successfully with the company?
  
  
• Are the earnings on an upward trend with good and consistent profit margins?
  
  
• Is the debt-to-equity ratio low, or is the earnings-to-debt ratio high? Can the company repay debt even in years when earnings are lower than average?
  
  
• Does the company have high and consistent returns on invested capital?
  
  
• Does the company retain earnings for growth?
  
  
• Does the business have high maintenance cost of operations, high capital expenditure or investment cash outflow? (If so, that's not good.)
  
  
• Does the company reinvest earnings in good business opportunities? Does management have a good track record of profiting from these investments?
  
  
• Is the company free to adjust prices for inflation?

In short, he makes companies jump through a lot of hoops before he considers putting them in his portfolio.

Source : InvestmentU

Investments That Gives Dividends!

Image via Wikipedia When you buy into an equity investment (stocks or funds), you are mainly buying into the potential for capital appreciation and not so much for its dividend. However, when choosing an investment, a safer bet would be to go with the one with a consistent and sustainable dividend policy. Studies have shown this is a good barometer of future capital appreciation of an investment.

Dividends: Between 1872 and 2002, stocks returned an average compound rate of 9%. Earnings-per-share (EPS) grew at 3.3% and price-to-earnings (PE) ratios grew at 0.7%. Reinvested stock dividends contributed 4.8% - more than half of the total return. Favor a stock with dividends for this very reason. You'll get paid to hold a stock while the market takes time to recognize its value

Further, to accelerate your capital appreciation, you should re-invest the dividends. Buying into more shares of the investment using the dividends received will enable you to receive more dividends in future. This is how compounding works. This also utilizes Dollar-Cost Averaging(DCA) as you are buying into the investment at different prices.

This should be the strategy for anyone who is between 20-50 years old as you have time on your side for your investments to do its compounding magic.

The end goal would be to create a dividend revenue stream from the investments that you can live on by 60years old.

If you do not intend to pass all of your wealth to the next generation, then you could also opt to liquidate part of your investment as and when needed for high-ticket purchases or lifestyle aspirations. Though you will need to plan properly as this will reduce your cashflow from the dividends.

The Joseph Cycle - Simon Sim

Image by alemdag via Flickr A nice quote I got from "The Joseph Cycle" by Simon Sim.

The more you save, the more you will have. Saving creates wealth; wealth attracts more wealth. Thus, it is said, "Money makes money!".

Anyway, the Joseph Cycle is a good read for people who are interested in economic cycles and how it can help in stock investment. For those in a hurry, the gist of the book is in credentialing and validating the Biblical Joseph Cycle of 7 Fat years and 7 lean years. The Joseph Cycle equates to a 7 year bull and 7 year bear in the stock market. After which, Simon mentions that for most, we have only 2 opportunities within our lifetime to take advantage of these cycles. The beginning of the last bull started in 2001 and will end somewhere inside 2008. After which, there will be the 7 years bear from 2009-2015. Thus, the year 2015 will be the bottom as well as the next start of a bull and if we believe in the Joseph Cycle, we will do well to invest during the start of the bull and hold on till the end of the cycle, ignoring most crisis along the way. But he does mentioned that you can still invest even if it's a bear cycle as long as the stock is undervalued or a crisis present an opportunity.

My conclusion? Well, it means that life carries on and we still will have to stick to our usual investment philosophy of asset allocation. For stocks, buying quality companies at fair prices giving fair dividends. For mutual funds, just let it grow thru' the dividends reinvested (since the fund manager is supposed to be doing the stock picking for you).

Get-Rick Quick Seminars or Die Trying

When I first started out doing investments, I had attended a few seminars of options, cfd, forex, stocks, properties that boast immediate profits or explosive returns of 500% etc etc. However, I have always doubted the effectiveness for the investors. But I never doubted the effectiveness for the trainer. The trainers are indeed making explosive profits and guaranteed RISK-FREE. Com'on, if someone can make 500% (or even 10%) a month consistently, he would either be managing a fund and High networth individuals would definitely be clamouring to invest in this type of gurus. You retail investors will not have access to them outright like with all other financial products or investments. So, why are they teaching? To spread the holy goodness to everyone as a way to give back to society? I seriously think Singapore financial regulatory body should start monitoring and regulating activities of this investing seminars.

For me, I will stick to verifiable sources of expertise like books written by gurus whose primary activities are what they are writing about.. Example, Donald Trump writes about real estate, his business is real estate and everyone knows a substantial part of his income and networth is in business, not training. Or when Peter Lynch writes about "one up on wall street", this guy manages a very successful mutual fund previously, he retired Freaking rich.. He does not depend on the training session for income or his networth. There are so many verifiable gurus out there in your library or bookstore and it costs much less.

Anyway, below is a comprehensive feedback by bloggers of the various investment seminars out there. Go check it out before you plonked your money into the courses.

jmot’s Blog

I am like many singaporeans trying to learn to trade by attending seminars since 2003 that sprung up like mushrooms. I would say I am cheated/mislead) by the seminar I attended. Basically the trainer go through theory but not really how to make money trading. After 4 years since 2003 I am still not making money, I find Trading is not a walk in the park and you can lose all your money as I have found out. I want to forewarn those naive singaporeans about those dangerous half-truth seminars where the trainer seems more a motivational speaker than a trader.

My criteria now for trading seminars is
1) the trainer himself managing a fund and has a verfiable track record
2) the trainer is not making most of his money selling seminars but from fund management
3) teaches trading systems not a generic bunch of options theory
4) Excellent post-seminar support and training, contactable
can offer a trading program that last months not just a weekend
(Trading needs not months but years to achieve proficiency)
5) Seminar attendents are making consistent profits from trading systems(Not trading theory) taught

Don't Lose your pants! Look at the percentage loss not the absolute loss

Image by Renegade98 via Flickr During this hard times in the market, people feel compelled to sell out their investment.

They panicked when they see losses of $3~4k in their individual stock and maybe a loss of $30k in their portfolio.

However, you should only sell if you feel the investment has served its purpose or the price is right or the business behind the investment does not have a compelling future.

One way to mitigate the desire to sell is to look at the percentage loss instead... so the $30k loss could only be a blip in your portfolio as it is only a 3% loss. If you believe the market returns an average of 6-10% per annum, then a 3% loss is not really a cause for alarm.

My investment portfolio is currently down 2.6% and that translates to a loss in the region of $200k, but I'm holding tight.. Are you?

Rule 2 - Take Profit, Cut Loss, Money Management

Image via WikipediaWhile a buy and hold strategy for equities is advocated by many financial advisors or even gurus, they are using timeframe of investment as a basis for making that argument. Usually, the time frame they are talking about is 15 years onwards as historical returns have shown in the long run, equities do outperform bonds and other asset classes and it averages around 7-10%. If you are interested in long run averages in stock and why stock is a good investment, you can read Stocks for the Long Run by Jeremy Siegel

However, in the short-run, you better have some idea of money management and when to take profit and cut loss. In other words, a bit of active management is required on your part.

For the whole portfolio, an approach called rebalancing is necessary. Rebalancing means selling your outperforming asset class and buying your underperforming asset class. The rebalancing frequency often suggested is semi-annully or yearly as anything more frequent might not give you any added returns. This requires you to examine your portfolio asset allocation and "rebalance" your asset classes percentage back to the desired allocation percentage. This will shift your portfolio back to your desired risk-return characteristic.

Rebalancing, if done correctly, will force you to 'Sell High(sell outperforming asset), Buy Low(buy underperforming asset)'. It's a discipline enforced on you to take profit.

For individual invesments within the asset classes, you need to adopt a disciple of taking profit and cutting losses. This is because no one can get a 100% accuracy on his/her investment views. You might have done serious mental work on which investment might be the next performer but what if you are wrong? Are you going to stick to your investment and usually, you become emotionally attached to your invesmtent. Or when your high flying investment takes a 20% drop, do you think it's time to re-evaluate your decision on the investment?

A way to achieve an emotionless investing approach to taking your profit and cutting your loss is to adopt a trailing stop loss strategy. This requires a fair bit of active monitoring on your part. Whenever you buy into an investment (especially stocks), do a mental trailing stop loss strategy of 20%. This requires you to ensure that your investment never drops more than 20% off its highest traded price. I use 20% as it is within my comfort level and I do not get stop out so frequently. You will have to find a percentage you feel comfortable with, though anything below 10% is most likely detrimental to your strategy as you can see the annualized volatility for stocks is around 15%.

Yes, the investment might rally after the 20% drop, but what if you are wrong? The investment might languish in that trading range for a long time. There are so much investment opportunities out there, don't let a bad investment decision tied you up.

If you bought into an investment and your investment soared 50%, you still need to do a mental trailling stop loss. Should the investment drops 20%, you take your profit! This ensures you have a 30% profit in hand for other investment opportunities and not wait for the investment to drop further and reduce your profit.

Lastly, for whatever investment you made, you need to adopt a proper money management technique. Run your investment portfolio like you are a fund manager! Adopt proper position sizing by allocating no more than 5%(maximum) of your total investment value into any investment. This way, you can ensure that a 20% loss on any of your investment will translate only to an insignificant 1% loss in your total investment value.

You might argue that this also means that a 20% gain in any of your investment will translate to only 1% gain in your total investment value. Look at the BIG PICTURE! If you were a good investor and allocate 5% to every investment, you will have 20 investments in your portfolio. If you achieve a 20% gain in all of your investments within a 1 year period, your total gain for your portfolio will be 20%! Congratulations! You are on the same level as Warren Buffet who averages 23% on compounded annual growth. Just kidding, you have to achieve that at least 10 years in a row for any one to believe you are in the same league as Warren Buffett.

So remember, do not over-allocate and let one bad investment decision deciminate all your gains accumulated by other investment. In the long-run, you will be better off!

Yes, you won't get rich fast, but you won't be a pauper either.