Tuesday, June 28, 2016

XIV: NOT Investment Advice, But Something to Consider

[IMPORTANT PREFATORY NOTE: This is NOT to be taken as investment advise or relied on in any way. Nor is this a recommendation of any kind as to what to do or not do. It merely is a description of an approach that some are following. Past results should not be relied on as to what will happen in the future]

Suppose you have a portfolio made up of 5 different mutual funds, and that, as of last Thursday, each mutual fund had a value of $20 and your total portfolio had a value of $100. Then, after the Brexit vote was announced, each of your mutual funds dropped in value by $2 or 10%, so your total portfolio now has a total value of $90. Reputable financial advisers will give the excellent advice not to panic, stay the course, and don't worry, because the market will recover. And nothing in this post should be taken as contradicting or rejecting that advice. But, there is a different approach one might consider, and here it is:

Suppose you can find something to invest in that, as the market settles down and recovers, it will rise in value but at a much higher rate than any of the mutual funds you hold. For example, suppose there is something you can buy that, when those mutual funds go up by 3%, that thing will go up by 30%. Thus, if you can find such a thing, you could sell two of your mutual funds, put $36 in that thing, and get back to where you were completely with just a 3% rise in the market but a 30% rise in that thing.
Looked at that way, you could sell out all your mutual funds which would prevent any further decline in their value, and still get back to even with the same 3% rise in the market and 30% rise in that thing. And then, when you get back to where you were, you can sell the thing, stay out of the market completely, and wait for that thing to go back down again to a point where it's again an attractive buy.

I cannot tell you there is any "thing" that would act like the "thing" described above. But, what I can tell you is that XIV was at 27+ the day before the Brexit vote and Monday was at 20+ and Tuesday morning was back over 22. If you look at historical charts, you will see that XIV often remains above 30 during times of calm and while the market is doing good, but will go down into the low 20s and even lower when markets are volatile and selling prevails (e.g., XIV went down to 17 following the market decline that began last August and persisted until earlier this year, and then went up to the high 20s and low 30s before the Brexit stuff when it 20.3).

Again, to repeat and stress, this is NOT to be taken as a recommendation to buy XIV. It is simply giving some historical information which might explain why some people are out of the market entirely except when they have bought XIV and are waiting to sell it, why others have remained in the market but lightened substantially the amount they have in the market having bought XIV and are waiting to sell it, and why others have bought XIV and are waiting to sell it without having substantially lightened the amount they have in the market (i.e., they used spare cash to buy XIV). And please note that, in all these instances, at the moment these people bought XIV, they immediately thereafter put in a GTC sell order or a ladder of GTC sell orders so that the sell(s) will happen automatically without monitoring XIV on an active basis. These sell orders typically have been in the 25-29 range, although on occasion they have been known to go up to 32.

[IMPORTANT FINAL NOTE: This is NOT to be taken as investment advise or relied on in any way. Nor is this a recommendation of any kind as to what to do or not do. It merely is a description of an approach that some are following. Past results should not be relied on as to what will happen in the future]




No comments:

Post a Comment