Monday, June 6, 2016

Timing the Market

It is often said that "timing the market" is a fool's errand, and that it cannot and it should not be done. Under this view, "timing the market" is understood to mean, "buy when it's low, and sell when it's high," and under that understanding, it is true beyond peradventure that trying to time the market is wrong, wrong-headed, and sheer idiocy. But "timing the market" can have two other meanings, where timing the market is the smartest thing you can do. Here they are:

Timing the Market Type One: If any prospective gains are not going to change your life-style or your security, and you have enough money to live on, and any significant market losses might jeopardize your security or your life-style, or you would just find them exceedingly unpleasant, then time the market this way: Get out! Go to FDIC-insured CDs and Treasury bonds with fixed maturity dates. Or, to get a somewhat better return, take a look at ETF bond funds with defined maturity dates that you can ladder. Or think about a small portion of your portfolio in a variable bond annuity. You will never have to look at the market again. You will sleep better. And you will find much better things to worry about and to give you pleasure. [Note: This suggestion was developed before Jane Hodges urged the same approach in the WSJ (at Article ("How Much Stock Should You Have in Your Retirement Accounts?")]

Timing the Market Type Two: If there is a black swan or other such event where the market swoons, deploy some amount of cash you can afford into XIV, which in effect shorts the volatility (or fear) index (the VIX). If you buy the XIV at 20 or less, you can expect a 50% return at some point after the market starts settling down, i.e., the XIV will go North of 30. As soon as you make the buy, you might put in laddered GTC sell orders. [Note: Unfortunately, because of the erosion effect due to the negative roll of covering the futures on a daily basis (aka contango), there is no viable trading mechanism to go the other way, i.e., to buy the VIX (actually it would be the VIXY) when it is quite low (which it will be after the market has had a good run), and holding until it rises sharply (which it will do as the market swoons)]

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