Make a Portfolio Safer By Using A Risky Asset

We made it through September, less than 3 months to Christmas. September started off with the experts saying that the economy was bad and people should be fearful of the future. Guidance from some experts was to get out of the stock market. The stock market rose significantly during September, the best September in 71 years. These well paid experts did not do anyone any favors.

This newsletter will include the weekly recap from Vanguard, a section on how to make a portfolio safer by using a risky asset, and some trivia on October.

Vanguard

The economy expanded in the second quarter but remains weak. Manufacturing continues to grow but also at a slow pace. Consumer confidence fell, even as incomes rose and spending increased modestly. For the week ended October 1, the S&P 500 Index fell 0.2% to 1,146 (for a year-to-date total return, including price change plus dividends, of about 4.3%). The yield of the 10-year U.S. Treasury note fell 10 basis points to 2.52% (for a year-to-date decrease of 133 basis points).


Making a Portfolio Safer Using a Risky Asset

Traditional thinking is that if a person wants a conservative portfolio that only conservative investments should be included. These investments include short term bonds and money market funds that typically give a low return.

An alternative approach is to use the principle of co-variance where risky assets that move differently from each other give a better return with a portfolio with the same low risk. The idea is to have an asset that go up when another goes down with each asset going up with time. The normal approaches is to put stock mutual funds and bond mutual funds together in some proportion.

A different approach is to use a risky asset that goes the opposite direction of the stock market. The concept is to purchase a volatility index that goes the opposite direction of the stock market. This volatility index has considerable leverage which moves at a faster rate than the stock market.

A perfect example of how to use this approach is investing during September when the experts are giving advice that now is a good time to take profits. Instead of getting out of the stock market and missing out on the stock market rally the approach is to sell a fraction of stock mutual funds and purchase the volatility index. In this manner, the volatility index acts like an insurance policy. A drop in the stock market is ofset by an increase in the volatility index and the investor maintains balance.

Trivia

October is the tenth month in the Gregorian calendar. It received its name from the Latin numeral “octo” meaning “eight”, because in the first Roman calendar it was the eighth month.

Dayight Savings Time ends every year at 2:00 A.M. local time on the last Sunday of October.

The German Oktoberfest celebration (now held around the world) originally began on October 17, 1810, the wedding day of King Ludwig I.

In merry old England during olden times the month of October was once named “Winmonth”, which meant wine month. It has also been called ‘Teo-monath’ (Tenth month) and ‘Winter-fylleth’ (Winter full moon) in the Old Saxon traditions.

Canada celebrates their Thanksgiving on the second Monday of October.