The SP500 is up ~3.0% since the end of September while my "hedged fund" is up only 0.65% . So I was wrong about the short term expectations of a correction. In fact I have been wrong almost all year, and my total portfolio is up only 6.0% as of Friday. In my own defence, part of my "error" was an experiment in volatility reduction. As often explained here earlier, one can do that partly by selecting funds with histories of low volatility gains by diverse methods, and partly by putting on index hedges . In 2006 the index funds themselves have been leaders as money gravitated back to large caps which are heavily represented in capitilization-weighted market indexes. I have only had the direct hedges since May, and the indexes only began to outperform later in the summer as the new craze for dividends began, but the hedges nearly outperformed the "hedged".
Also in my defense is the fact that my total portfolio never drew down more than 3.25% from any new high value during this year: that despite my still holding some metals and energy positions. So volatility capping has its rewards as well as its costs. The reward largely is "peace of mind" or a low "ulcer index".
I am still looking for a decline during which--hopefully at the end!--I can remove the active index short hedges which have tied up less than 6% of assets but which hedged at a 10% rate due to their leverage. Given the innate hedging of the diversified portfolio, the low volatilty funds largely employed by me, and a good bit of HSGFX from Hussman, additional active hedging with indexes is probably overkill on my part.
So I have proven sufficiently to myself that volatility capping is truly valuable to me but that it can be overdone. Since I will living on the portfolio after transitioning to retirement (unemployment) in a year or so, I needed to reposition and get a feel for these c0ncepts. I think of poor souls with high volatility index funds and stocks who retired at the end of 2000 and saw their equity decline by 20-40% in the first two years of retirement. That is a complete destroyer and a big NO-NO for any investor at that point. And that is exactly where the random walkers like John Bogle are completely wrong.
However, most people reading this page are probably in asset growth mode rather than retirement. So I want to spend some time over the next few months explaining how their portfolio composition and approach needs to be entirely different especially if they are--as they should be-- putting new money in each month, quarter or year. When you are adding new money and automatically reinvesting dividends, volatility is your friend over the long term.
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