After recent loss of capital in trading endeavor I have started thinking about long term AAP. My bad trading is somewhat detailed in Day Trading thread for those curious to know. What is worse is that my risk appetite is now considerably reduced. I am very risk averse. Here is what I am finding difficult to do now. I think US market is going to take dive in next 12 to 18 months or so. The yield curve is almost about to invert. Fed is in cleanup operation as far as its balance sheet is considered. There are severe headwinds for the market. Also the market in last 2 years in SPY has almost put it on the top of the cycle with a yield of 1.85% and backward p/e of 25 and forward guess for p/e of 15 (?). This reminds me of the real estate market of 2008 when the rent yield was 1.5% of the price of the real estate assets and yet there was a speculation of 10% yoy growth of the real estate.
The large caps in US have participated in stock buy back programs which were illegal during most of the 20th century because they were considered stock manipulation. The lower for longer interest rates have fueled the frenzy of stock buyback on cheap credit thereby elevating the stock price. On the other side there are inflation worries that will force the fed to increase the interest rate. The interest rate will decimate long term bonds as wells as equities. Next four years, a lot of bond maturities are due for US corporations and they are going to find it difficult to issue bonds at higher interest rates.
As an individual, what is the safest bet ? Before my latest horrible trades, I was collecting a meagre 3 to 4% returns annualized on my net worth by selling deep Out of money puts on SPY plus bond interest. Should I revert back to my mean ? I find no safety in the stock market at all. I am opening this thread for a discussion on what your thoughts are on this. I know the returns are low, but almost guaranteed with a chance of getting assigned at extremely low value of SPY which could be a welcome event.
Also it's worth introspecting a little on my tradin misadevntures :
During the last quarter of 2017, I somehow started thinking that it's extremely easy to make money selling puts. I was thinking as long as I hedge my puts with selling puts of inverse etfs, I should be good. I started doing trades that if I assigned would be way more than my net worth. Also some hedging calculations were simplistic and incorrect. I also was emotionally thinking of offsetting my initial losses by making trades that compensate them. I had departed from my initial conservative style and was punished. When I realized that what I was doing was basically gambling, to liquidate the trades required me to pay higher premiums and lost significant chunk.
Also I realized my limitations as an individual. After all, I am one man caring for family and not a hedge fund which can fold tomorrow and show middle finger to the investors. If I lose, I take it on the chin and my family suffers. This whole episode was a great wakeup call.
Asset Allocation Plan & introspection
Asset Allocation Plan & introspection
cantor;673437 I think US market is going to take dive in next 12 to 18 months or so.
If you are truly convinced about this fact, there's nothing else to do. CDs for 2 years and review at that time?
Or may be with recent market corrections, put half in 2 year CD, DCA the other half over next 6 months?
-
Desi2return
- Posts: 157
- Joined: Fri Nov 14, 2008 1:27 am
Asset Allocation Plan & introspection
ILuvHyd;673484If you are truly convinced about this fact,
He is not.....else he would be shorting the market :) and also its not a fact......no one really know what will happen next to the markets. Remember the night of the elections? Futures plunged over night but by the end of the next day....market was way up.
Only suggestion I have for OP is - do what you do the best...if you have conviction on your original strategy why not continue doing that? Yes you tried something else that did not work and yes you took a hit.....so what? get over it, learn from your mistakes and move on. If you are scared of the markets, take a big break....1 or 2 years break....Keep money in CD/Cash and revisit after your break. Start slow and ramp up. Keep a tight leach on your positions the moment you realize market is taking away your money, you sell/cover and move to cash. If this keeps happening too much and you are losing money more than you making it, then your strategy is screwed up to begin with or the timing is off for your strategy.
Asset Allocation Plan & introspection
Desi2return,
Thanks for understanding where I stand. I am already mostly in short term bonds. After the loss, I have lost the daring to make any (even the safest ones) trades. I am thinking of going with my original slow and steady strategy which earns very little 3-4 percent per year. I am going to be in bonds mostly and sleep well at night. One of my friends was telling me that as much as we think, US govt really does not give a damn if the market corrects substantially. 78% of the US population does not even invest in stock market. They are pretty much unaffected by the moves. If stock market takes a dive, it's mostly the 22% people suffer. Out of those the top 1 percent don't give a damn, since they are the market and they have humongous wealth to pump and dump. It's basically a scheme for transfer of wealth and the segment we belong, we don't have any control. The best is always to buy extremely low. The only way I can invest is extreme slow dollar cost averaging along with naked cash covered put sells.
Moreover, if one is in his 40s, he is already past his prime. Sudden offsets in net worth may not be recoverable by earning. So that consideration is the most important of all. The way I have started thinking is "It's ok if I don't make the most return as long as I don't lose my capital". In other words capital preservation is the most important.
Thanks for understanding where I stand. I am already mostly in short term bonds. After the loss, I have lost the daring to make any (even the safest ones) trades. I am thinking of going with my original slow and steady strategy which earns very little 3-4 percent per year. I am going to be in bonds mostly and sleep well at night. One of my friends was telling me that as much as we think, US govt really does not give a damn if the market corrects substantially. 78% of the US population does not even invest in stock market. They are pretty much unaffected by the moves. If stock market takes a dive, it's mostly the 22% people suffer. Out of those the top 1 percent don't give a damn, since they are the market and they have humongous wealth to pump and dump. It's basically a scheme for transfer of wealth and the segment we belong, we don't have any control. The best is always to buy extremely low. The only way I can invest is extreme slow dollar cost averaging along with naked cash covered put sells.
Moreover, if one is in his 40s, he is already past his prime. Sudden offsets in net worth may not be recoverable by earning. So that consideration is the most important of all. The way I have started thinking is "It's ok if I don't make the most return as long as I don't lose my capital". In other words capital preservation is the most important.
-
Desi2return
- Posts: 157
- Joined: Fri Nov 14, 2008 1:27 am
Asset Allocation Plan & introspection
cantor;673498Desi2return,
Thanks for understanding where I stand. I am already mostly in short term bonds. After the loss, I have lost the daring to make any (even the safest ones) trades. I am thinking of going with my original slow and steady strategy which earns very little 3-4 percent per year. I am going to be in bonds mostly and sleep well at night. One of my friends was telling me that as much as we think, US govt really does not give a damn if the market corrects substantially. 78% of the US population does not even invest in stock market. They are pretty much unaffected by the moves. If stock market takes a dive, it's mostly the 22% people suffer. Out of those the top 1 percent don't give a damn, since they are the market and they have humongous wealth to pump and dump. It's basically a scheme for transfer of wealth and the segment we belong, we don't have any control. The best is always to buy extremely low. The only way I can invest is extreme slow dollar cost averaging along with naked cash covered put sells.
Moreover, if one is in his 40s, he is already past his prime. Sudden offsets in net worth may not be recoverable by earning. So that consideration is the most important of all. The way I have started thinking is "It's ok if I don't make the most return as long as I don't lose my capital". In other words capital preservation is the most important.
I don't think this is true......401K plans, pension plans etc are all invested in the stock market unless they are actively managed (even in that case most of them stay invested). Just because one does not invest his/her savings in the stock market does not mean they don't give a damn. If market falls substantially (>50%) that means underlying economy is in great danger. Remember stock market is forward looking hence usually tell you what is coming down the line. Usually bull markets form at the worst possible economic times - this is because, leadership is actively working on fixing the problems.
Asset Allocation Plan & introspection
May be true, but 20 to 30% corrections have happened and are a part of healthy market. Correction takes out the speculators. But there are times even fed can't do anything to prop it ip. When fear takes over, market always undershoots. It gives entry to those in cash. Those who are in market book losses. As we saw it's more like a 10 years cycle. And even these cycles can't run indefinitely. They are a function of population growth (consumption). Look at Japan, stagnant population and more than 2 decades have gone and stock market has not grown at all. That will be the worst nightmare, a 'L' shaped recovery. That means if you are in market and such a draw down happens, it can majorly upset your apple cart.
-
Desi2return
- Posts: 157
- Joined: Fri Nov 14, 2008 1:27 am
Asset Allocation Plan & introspection
cantor;673504May be true, but 20 to 30% corrections have happened and are a part of healthy market. Correction takes out the speculators. But there are times even fed can't do anything to prop it ip. When fear takes over, market always undershoots. It gives entry to those in cash. Those who are in market book losses. As we saw it's more like a 10 years cycle. And even these cycles can't run indefinitely. They are a function of population growth (consumption). Look at Japan, stagnant population and more than 2 decades have gone and stock market has not grown at all. That will be the worst nightmare, a 'L' shaped recovery. That means if you are in market and such a draw down happens, it can majorly upset your apple cart.
Desi last year introduced me to IBD (investor's business daily). Check it out.....all your questions/concerns have been already addressed....nothing new.
Asset Allocation Plan & introspection
I have been the markets now long enough to realize that you cannot time markets. It is actually harmful to have any opinion of how markets will behave in the future. Best is to be agnostic of market valuations and have a proper asset allocation depending on what stage of life you are.
In my case now I am 40% invested in the markets. My portfolio has global ETFs. Both developed and emerging markets. Remaining 60% in NRE FDs.
I am 38 and I don't need this money until retirement or atleast another 15 years. So I really don't care if markets crash 50% next year. I will get lower levels to invest.
My target allocation will be to take it to 70 to 80% allocation to markets under extreme case if markets correct like 50%. Until then I will just keep investing any new salary savings into markets.
Sent from my Redmi Note 4 using Tapatalk
In my case now I am 40% invested in the markets. My portfolio has global ETFs. Both developed and emerging markets. Remaining 60% in NRE FDs.
I am 38 and I don't need this money until retirement or atleast another 15 years. So I really don't care if markets crash 50% next year. I will get lower levels to invest.
My target allocation will be to take it to 70 to 80% allocation to markets under extreme case if markets correct like 50%. Until then I will just keep investing any new salary savings into markets.
Sent from my Redmi Note 4 using Tapatalk
Asset Allocation Plan & introspection
wd40, sorry to criticize your post, your are contradicting yourself :(
> It is actually harmful to have any opinion of how markets will behave in the future.
in the next para you say:
> My target allocation will be to take it to 70 to 80% allocation to markets under extreme case if markets correct like 50%
When market is going Down ...people are scared to invest, when market is up people are scared to invest. The best mantra (per Desi ..he is The Warren Buffet of R2I Club) ..is to you have a asset allocation plan. For you, 40% in stock market ..which is good keep it like that in upmarkets & downmarkets with yearly re-balancing.
my 2 cents
> It is actually harmful to have any opinion of how markets will behave in the future.
in the next para you say:
> My target allocation will be to take it to 70 to 80% allocation to markets under extreme case if markets correct like 50%
When market is going Down ...people are scared to invest, when market is up people are scared to invest. The best mantra (per Desi ..he is The Warren Buffet of R2I Club) ..is to you have a asset allocation plan. For you, 40% in stock market ..which is good keep it like that in upmarkets & downmarkets with yearly re-balancing.
my 2 cents
Asset Allocation Plan & introspection
Its not harmful to have opinion about how markets are going to behave in near future.......but you need to back up your reasoning and still not take extreme steps just in case we were wrong with our forecast. And always try to give a probability weighting about what may happen that will tell you that its better to sit quiet even though bad things may happen to your investment.
Example: there was a lot of Trade war fear few weeks ago. And after all the reading I did, I cam to conclusion that the probability that Trump will start a real trade war and make the markets tank 20-30% is very low (I would give 10-15% probability, not impossible) since that will affect the mid term elections, not in his favor.
But there is a small chance that he can make trade war sound like a real war against China and not care for financial markets since 70% of his base may not have significant investments in markets.
In either case, it would be a big gamble to start a trade war just before mid term, so I decided to act as though trade war is impossible hence I did not spend any money on buying puts to hedge my positions (puts are not cheap at the moment).
In case I am wrong, and there is a trade war sending markets down 30%, I have enough cash in my portfolio and FD that it will be a good buying opportunity for me.
Next up, interest rate future.
my hypothesis is, we may reach 3.4-3.7% on 10 year in next 12 months, reason is: its the thing to do now, when everyone piles on one trade it does happen. Not to mention that US govt is now running deficit close to a trillion every year, hence they are having to sell way more bonds. Also trade war talks have made exporters cautious about putting all their eggs in US bonds, maybe they would like to teach uncle sam a lesson by showing how rates will go higher if they want to hinder trade.
But once it starts to creep up from current level of 3% towards 3.2-3.3, it will put downward pressure on stock/bonds, consumer spending and business investment, which means it will meet natural resistance in the form of deflation. And when risky assets are going down people usually buy UST bonds, which will be the brake to rates going higher.
But, in case rate does reach 3.5%, there is a good probability that stocks will tank 10-20% because it will feel like end of current bull market hence people may try to get out of stocks.
To make matters worse, there is a small probability that rates may go as high as 4%, in case there is an infrastructure spending bill to add more fuel to the economy running at full capacity.
Unfortunately, I dont have a crystal ball, hence I am still sticking with my investments since I dont have higher than 70% confidence in anything other than rates going higher. Even with rates going higher, 5 year bonds are looking better than cash at 2.8%, and this will naturally act like brakes on higher rates since 2.8% is acceptable for short term bonds.
Only one thing, I can say with 90% confidence, rates are not going lower than 2.5% unless there is a macro economic shock like trade war or impeachment etc.
Example: there was a lot of Trade war fear few weeks ago. And after all the reading I did, I cam to conclusion that the probability that Trump will start a real trade war and make the markets tank 20-30% is very low (I would give 10-15% probability, not impossible) since that will affect the mid term elections, not in his favor.
But there is a small chance that he can make trade war sound like a real war against China and not care for financial markets since 70% of his base may not have significant investments in markets.
In either case, it would be a big gamble to start a trade war just before mid term, so I decided to act as though trade war is impossible hence I did not spend any money on buying puts to hedge my positions (puts are not cheap at the moment).
In case I am wrong, and there is a trade war sending markets down 30%, I have enough cash in my portfolio and FD that it will be a good buying opportunity for me.
Next up, interest rate future.
my hypothesis is, we may reach 3.4-3.7% on 10 year in next 12 months, reason is: its the thing to do now, when everyone piles on one trade it does happen. Not to mention that US govt is now running deficit close to a trillion every year, hence they are having to sell way more bonds. Also trade war talks have made exporters cautious about putting all their eggs in US bonds, maybe they would like to teach uncle sam a lesson by showing how rates will go higher if they want to hinder trade.
But once it starts to creep up from current level of 3% towards 3.2-3.3, it will put downward pressure on stock/bonds, consumer spending and business investment, which means it will meet natural resistance in the form of deflation. And when risky assets are going down people usually buy UST bonds, which will be the brake to rates going higher.
But, in case rate does reach 3.5%, there is a good probability that stocks will tank 10-20% because it will feel like end of current bull market hence people may try to get out of stocks.
To make matters worse, there is a small probability that rates may go as high as 4%, in case there is an infrastructure spending bill to add more fuel to the economy running at full capacity.
Unfortunately, I dont have a crystal ball, hence I am still sticking with my investments since I dont have higher than 70% confidence in anything other than rates going higher. Even with rates going higher, 5 year bonds are looking better than cash at 2.8%, and this will naturally act like brakes on higher rates since 2.8% is acceptable for short term bonds.
Only one thing, I can say with 90% confidence, rates are not going lower than 2.5% unless there is a macro economic shock like trade war or impeachment etc.
wd40;673860I have been the markets now long enough to realize that you cannot time markets. It is actually harmful to have any opinion of how markets will behave in the future. Best is to be agnostic of market valuations and have a proper asset allocation depending on what stage of life you are.
In my case now I am 40% invested in the markets. My portfolio has global ETFs. Both developed and emerging markets. Remaining 60% in NRE FDs.
I am 38 and I don't need this money until retirement or atleast another 15 years. So I really don't care if markets crash 50% next year. I will get lower levels to invest.
My target allocation will be to take it to 70 to 80% allocation to markets under extreme case if markets correct like 50%. Until then I will just keep investing any new salary savings into markets.
Sent from my Redmi Note 4 using Tapatalk