<ol>
<li><p>There is a lot of research which consistently indicates that index funds are the way to go because a) fund managers cannot consistently outperform the market and b) higher fees eat into gains.</p></li>
<li><p>Trying to consistently replicate (or beat) anything like the 22.5% gain over the past year requires taking on a lot of risk and is probably impossible in any event. Most people are doing very well if they can average 8-10% over time with the risk portion of their portfolio. I’d be curious to know what experienced, sophisticated investors like dstark and DocT think is a realistic goal.</p></li>
</ol>
<p>BTW. dstark, since you asked to be kept updated on XIV, it bounced back about 9% last month after a rough July. Currently up about 33% for the year. However, at some point there is inevitably going to be a big volatility spike. Could be next month but might not be for a year or more. No one can really tell.</p>
<p>EMM1, I used to own a real crystal ball when I was a kid. Do people still own those? I havent seen one for awhile. I dropped mine and it cracked. This is a real story. I kept it for many decades. I may have finally thrown it away on my last move.</p>
<p>If I had a crystal ball with regards to the stock market, it would be cloudy. I don’t know the future. I am not counting on 8 to 10 percent returns but they are attainable. 22% returns? I dont know what the world would look like if the stock market returned 22 percent a year. </p>
<p>The stock market Is going to do what the stock market is going to do and my opinion doesnt really matter.</p>
<p>I was reading a few things about the markets lately. Interest rates on bonds in the US are half of average . Short rates are negative I think in France. Germany’s 10 year rates are around 1 percent. Volatility is very low. The way the stock market works now has changed dramatically. Institutions do the vast amount of trading now compared to a couple of decades ago. Governments have always been active in the markets but now the interventions are enormous.
Wealth is very concentrated.</p>
<p>Anyway, after that digression, thanks for the xiv information. I like that information. That xiv trade has been a fantastic trade in 2014 and that is not an opinion. :)</p>
<p>It’s a different account. Mutual fund was 22.5%. Short term trading account is 30%. Intermediate account is more than 40%. 401k account is 10% with AA 36/64 ratio and a lot was in international which was brought down by Putin.</p>
<p>dstark, I didn’t mean to be asking for a prediction, just a reasonable objective. I think that one of the problems is, that as you suggest, we are in completely uncharted waters, with a stock market where, among other things, valuations have been inflated by influxes of money generated by accommodative monetary policy (incredibly enough, that was one of Helicopter Ben’s stated goals) and no readily available instruments that provide safe, significant income. </p>
<p>Like you, I have no crystal ball. For those of us who are not stock pickers, the challenge is to devise a strategy that will allow participation in at least a significant part of the gains if the stock market keeps rising but will not be crushed in the event of a significant or catastrophic downturn. The two that I have come up with over the years are the leap strategy that I put forward a couple of months ago and the idea of selling and buying when the 200 DMA is crossed. Both strategies have plusses and minuses, and there is obviously no guarantee that either will outperform the market over any particular time horizon.</p>
I realized I didn’t quite answer this question. Las year, 2013, the stock market went up 30% but if one uses the S&P 500, it went up from 1531.64 to 1856.12, which is 21%. So if you invest in the S&P 500 index that’s what you get.
This year from Oct 10, to now the S&P 500 went from 1856.12 to 2007.71 so it’s 7.5%. My returns went up from this period 22.5% from active managed funds.
So to answer your question, no it doesn’t include last year gain, in fact I was nervous of the market and didn’t take the plunge until I think perhaps it was a down day.</p>
<p>EDIT to add: I hope I got the correct S&P 500 numbers.</p>
<p>Finally got some DGLY shares to short. Shorted at 24.79 and covered at 23.44. My kind of quick trade. DGLY now above the short price. I hope it goes higher and shares become available. This stock was 3.5 a few weeks ago. </p>
<p>LOCO not setting up yet for a good short. It needs to go higher for a big drop. </p>
<p>Perhaps I am misunderstanding, but on October 10, 2013, SPY was at 167.29.</p>
<p>In any event, it is entirely possible for a managed fund to outperform over 1, 2, or even 5 years. But in the intermediate to long term, they almost always revert to the mean. Just ask the people who invested with Bill Miller.</p>
<p>EMM1, can you refresh my memory on the leap strategy?</p>
<p>I am concerned that I am reverting to the mean. :)</p>
<p>The income choices bug me. Big time . They are awful.
My bond portfolio is up over 10-15 percent this year and all that tells me is I going to lose that over time.
I am not excited about this. There is more likelihood the bonds will be called away and reinvestment risk has increased.</p>
<p>Then again, I am human and I dont want to see my portfolio decrease if rates rise even though if I take the long view, that is better for me
Also, maybe rates stay low…</p>
<p>Razorsharp, nice trade. Do you have an account at IB?</p>
<p>"Ok, I see dstark is back. So I thought that I would pick his brain and that of the other smart guys.</p>
<p>This comes under the heading of “if it seems to good to be true, it almost certainly is.” I was looking one year leaps for SPY and the at the money premium is less than 6%. So I thought, why not take 10% of what you have invested in SPY, buy the leap, and take the remainder and put it in VFIIX, with a completely secure yield of a little less than 3% and almost no volatility (actually, since I have access to TIAA, I can do better than that, but I wanted to make this an example with general applicability). If x is the gain in SPY over the year, and SPY yields 2% (actually, it yields a little less), your percentage gain from the strategy is 1.67(x-2)-7 if x-2 is greater than zero, and -7 if x-2 is less than or equal to zero. Your maximum loss is 7%, and you will outperform SPY if x is less than -7 or greater than 15% over a one year period, which happens about 60% of the time, and the big advantage for us old guys is that you miss the big downside moves.</p>
<p>Seems too good to be true. What am I missing?"</p>
<p>The leap strategy seeks to take advantage of the fact that volatility is currently low, buying leap call options on a number of shares equal in value to approximately 150% of the total amount of your capital and investing the remainder in something like a gnma fund with relatively high interest and low volatility. For example, a June, 2016 at the money spy option currently costs about about 8%. So if you had $100,000 to invest, you would buy $12,000 worth of options and invest $88,000 in your gnma fund. Assuming that your $88,000 is going to yield about $4000 over the relevant period, the gnma fund stays flat, spy yields about the same as the gnma fund, and x is the percentage gain of spy over the period, your gain is 1.5 (x-4)-8 (the option premium) + 4 (the gnma yield), or1.5x-10, with a maximum loss of 8%. The bottom line is that this strategy underperforms the market in times of small gains/losses but outperforms the market in periods of high gains and losses and in any event limits losses.</p>
<p>The caveat is that there is some volatility risk even with gnmas (although they tend to perform particularly well during market downturns–a good thing if you are looking to limit your downside risks). Obviously, you can also play with the ratios to change the risk profile.</p>
<p>Oops, I believe that I made a mistake in the calculations. It is not 1.5 (x-4)-8 + 4. It is 1.5x-4-8+4. (If you invested the entire $100,000 in spy stock, you would only get $4000 in dividends. That is the amount foregone by using the leaps instead).</p>
<p>EMM1, you didnt answer my qurstions. A rise in rates and or a rise in volatility will help this trade. If volatility rises 10 percent how much are the jun 16 options worth?</p>