We expect one thing, no matter what happens next…
Whether a serious bear market begins – as American Consequences contributor Porter Stansberry has warned… or whether the “Melt Up” continues for another year or more – as feature contributor Steve Sjuggerud has predicted…
You can at least count on volatility remaining elevated in the months ahead.
The last Melt Up in the late 1990s saw market-leading tech stocks soar more than 200% over the last year and a half of the rally.
But along the way, the market’s “fear gauge,” the CBOE Volatility Index (“VIX”), spiked above 25 more than 10 times. And those same market-leading tech stocks fell roughly 10% – a similar correction to what we’ve seen this year – on five separate occasions. That’s about once every three and a half months.
The historic calm that we experienced over recent years is likely over. But if you’re trying to invest based on this expectation of higher volatility, watch out…
So-called “long volatility” has suddenly become a popular trade. It’s getting crowded. Traders are now making record speculative bets that volatility will move higher.
Make no mistake… trading the VIX is difficult. As the Wall Street Journal recently reported in an article headlined “Bet Against Volatility? You Lost. Bet On It? You Lost Too!”:
One group of hedge funds has long pitched the idea they can protect investors and even prosper when markets fall sharply. But when volatility returned, the big idea didn’t work…
The reason: The funds kept betting on sharp falls, but failed to profit from sharp rebounds – a disappointment after years of losing money in the bull market, according to portfolio managers.
The woes of these “tail-risk” funds, designed to benefit from market turmoil, show that in a month when many investors lost massive sums betting against volatility, wagers on it proved tricky too.
And simply because we expect volatility overall to increase in the market doesn’t mean that you can “buy the VIX” and profit. Even during periods of elevated fear and volatility, the VIX doesn’t remain at highs for long. It spikes and falls – often dramatically – before spiking again.
And if an increase in volatility does lead to a real panic and a significant double-digit pullback in the market… take advantage of it.
Hopefully, you have a plan for what you’ll do if the market drops 20%… 30%… or more.
Your plan is personal, but ideally you’ve already put aside some cash and you are watching your trailing stops on your portfolio positions. In addition, you hopefully have non-correlated assets (like gold or land) that will help buffer any major market declines.
As stocks go lower, so do the risks… And while lots of value is being “destroyed” in the market, just as much opportunity is being created – for you.
Think about your personal situation…
Do you understand the “big picture” for where at least one major sector of the market is going? Do you know what your portfolio has returned over the last year, five years, or 10 years? And have you considered how your broker or financial advisor gets paid?
If you’re unsure about how to answer any of these questions… take advantage of the low-cost research from financial publishing firm Stansberry Research.
There’s no link or anything to buy in this letter. In fact, it doesn’t even matter much which lead analyst you follow – Porter Stansberry, Steve Sjuggerud, or Dr. David “Doc” Eifrig. Each has produced world-class investment returns for their readers over the past 10 years…
Over the past 10 years, the S&P 500 has gone up a little more than 8% a year on average. And as you probably know, few investment firms are able to beat the S&P 500’s returns over long periods.
Legendary investor Warren Buffett made a well-known $1 million bet with asset-management firm Protégé Partners in December 2007 that the S&P 500 Index would outperform any five “fund of funds” over the next 10 years.
Buffett won his bet by a landslide…
The five funds that Protégé chose owned interests in more than 200 hedge funds. And they got off to a fast start… beating the S&P 500 in the first year of the bet.
But then, in every one of the nine years that followed, they trailed the index.
In the end, the S&P 500 posted an annual average gain of 8.5%, while the hedge funds posted returns of under 3%. And of course, for that horrible result, they paid themselves via staggering fees from their investors. As Buffett writes:
Even if the funds lost money for their investors during the decade, their managers could grow very rich. That would occur because fixed fees averaging a staggering 2.5% of assets or so were paid every year by the fund-of-funds’ investors, with part of these fees going to the managers at the five funds-of-funds and the balance going to the 200-plus managers of the underlying hedge funds…
So, with that in mind, what sort of returns would you expect from the recommendations made by a newsletter writer, who is only compensated via paid subscriptions – no advertising, no fees based on assets under management?
You might be surprised…
In his True Wealth newsletter, Steve Sjuggerud has produced average gains of 15.9% per year over the last decade. Virtually no one in the world who has been investing in large-cap, long-only, liquid equity can match these results over this period.
Porter Stansberry’s Investment Advisory follows a different approach, with both long positions and short positions, which are a drag on performance during bull markets. Still… the letter has produced average returns of 15.1% annually, again far outpacing the S&P 500 and coming very close to Steve’s stellar returns.
And Doc Eifrig’s newsletter, Retirement Millionaire, also posted incredible returns despite its focus on retired investors and containing a sizeable fixed-income allocation, which will also weigh on total returns during a bull market. Even so, over the past 10 years, his recommendations have generated 14.4% average annual gains.
These are each incredible, world-class results. All three of these analysts have blown away the S&P 500’s average return.
So again, I have three questions for you…
- Look at your portfolio… Do you understand why you own each of your positions?
- Compare your performance over the past decade… Did you beat or match the S&P 500?
- And finally, dig into the fees that you’ve paid your broker, whether on the front end (an hourly rate or annual fee) or back end (through commissions or fund fees). They might not be easy to find… Are you sure he is aligned with your interests?
If you answered any of these questions with a “No,” then you owe it to yourself to try one of these low-priced letters.
It doesn’t matter which one.
Despite their very different investment styles, Porter, Steve, and Doc are each fundamentally conservative investors.
More important, earning these sorts of returns – 14%-16% over a decade – will make anyone very rich, even assuming a low level of savings. Earning 15% in stocks while saving $10,000 per year will create a $1 million portfolio within 20 years… And it will surpass $5 million within another 10 years after that.
As I said earlier, there’s no link to buy in this issue of American Weekly Consequences.
I simply ask that you keep an open mind the next time you receive an offer for any one of these three letters. Yes, the advertising is often aggressive. I get that. But subscribers have unquestionably been well served.
And no matter what you do: As volatility increases, make sure you have a plan. Stay long, but stay smart. Manage your risk. Watch your trailing stops.
Finally, in honor of this increase in volatility, P.J. has made some revisions to the classic “Witches” scene in Shakespeare’s Macbeth…
Double, double toil and trouble;
Fire burn, and cauldron bubble.
In the cauldron bake and boil
Worries o’er the price of oil,
Woe of bull and ire of bear,
Donald Trump’s trade war scare,
Central bank interest rate antics,
Bond defaults, investor panics,
For a charm of powerful tricks
To sink the Dow and raise the VIX.
Be careful out there.
Now, here’s what we’re reading lately…
What’s a trillion or two between friends?
Even under the sunniest set of assumptions, the tax bill will add between $1 trillion and $1.5 trillion to the deficit over the next decade; the spending plan tacked on another $320 billion.
An inverted yield curve has preceded most U.S. recessions in recent decades…
The negative market signal comes as investors grapple with higher short-term borrowing costs, which have risen in the U.S. to levels unseen since the financial crisis.
Do you see a slow-motion train wreck, a valuation reversion to the mean, or a recession?
According to one analyst, the level where the S&P 500 could bottom depends on what kind of selloff Wall Street sees. But in any of three potential paths, more pain can be expected ahead.
Some folks see the wall as necessary for national security… But for most, it’s simply another way for the government to waste cash.
It occupies 1,954 miles of desert, mountains, cities, and valleys from the Pacific Ocean to the Gulf of Mexico and features a hodgepodge of iron bars, barbed wire, concrete blocks, sand levies, stone obelisks, rotting piles of logs, and plenty of wide-open land.
This is a major shift in sentiment. As many folks feared, are attract-’em-with-honey Obamacare handouts a sticky trap for voters?
Nationally, Democrats plan to campaign strongly for older voters, focusing on issues such as taxes, healthcare and the economy as campaigns heat up later this year… Republicans, meanwhile, are touting the benefits of their tax cuts and the improved economy.
Are you one of these folks shifting away from President Trump? Tell us why at [email protected].
With P.J. O’Rourke and the American Consequences Editorial Staff
April 11, 2018