Thu 16 Aug 2007
Wow. The VIX index has doubled in about a month. I’m thinking this is not a good indicator that the worst of this “market correction” is over.
Since gold and bonds are kind of flat during this correction (not that flat is bad – it beats 10-15% drops within 1 month), I’m wondering if a well balanced portfolio that can weather any storm would be best served with a sprinkle (maybe 2%) of VIX added to soften the blow.
August 16th, 2007 at 9:46 am
I’m not sure how you would “sprinkle some VIX” in your portfolio… unless you’re going to start trading options and futures?
August 16th, 2007 at 9:26 pm
If you did want exposure to the VIX, it would be very similar to buying index puts with a small portion of your assets. The insurance would be helpful during market corrections, but it would drag down your overall profits when the market is sailing along.
Taking 2% off the top of your performance can be a significant drag in normal times (think about the compounding).
If you believe in a secular bear market like me, there are other good alternatives such as actively managed funds or strategies, trailing stops, keeping cash and gold as significant asset classes for allocation (>5%), etc.
January 22nd, 2010 at 4:52 pm
Incidentally, there is now an ETN that tracks the VIX futures: VXX (It was launched ~1 year ago, I just learned about it…)
Note that the futures that the VXX tracks don’t actually track the VIX itself. For example today the VIX was up 20%, while VXX is only up 8%. The reason being that the VIX is a measure of current option activity, whereas the futures reflect what traders expect the VIX to finish at on contract expiration date.