Does anyone short the Market for long term protection using a Vanguard Fund or?

[soccerluvof4]

I know for the most part that most people , not all , use a certain amount of funds via Vanguard , Fidelity etc.. and have a split with bonds to protect against downside. My Question is with the market being so lofty and we have been saying that for years , does anyone add another layer of protection by perhaps using a certain percentage of their portfolio to short the market via an ETF or some other product and if so can you explain your strategy etc...  My Strategy has been to shave off more cash then usual but not sure thats the best Idea gaining 1.7% in VMMXX or in a CD and so on. So looking more towards actually shorting the market or is that foolish.

[reeshau]

This may not be what you meant, but shorting the market for a long term is not a smart strategy.  There are no 20 year periods where the S&P 500 are negative.  There are very few 10 years periods, and so on.  There are bear ETF's that you can buy, that do the shorting for you; even leveraged bear ETF's.  (So, they go up when the market goes down)  But look at their prospectuses, and they talk about ownership for days, not even months, much less years.  Guessing market performance in that kind of time frame magnifies risk, rather then reducing it.

[bacchi]

I'm FIRE so I protect the next 2 years spending with an OTM long put and a short call. By capping my losses, I'm sure to have enough to meet minimum spend. The short call is to pay for the put. If I get called, the market is >=+10% over 1-2 years; I'm happy with that for short term funds.

[ChpBstrd]

I'm FIRE so I protect the next 2 years spending with an OTM long put and a short call. By capping my losses, I'm sure to have enough to meet minimum spend. The short call is to pay for the put. If I get called, the market is >=+10% over 1-2 years; I'm happy with that for short term funds.

^ This is the way to do it, and particularly appropriate at a market P/E of about 24 and CAPE > 30. Google “collar strategy” to learn more.

Unfortunately the options market is thin for most Vanguard funds, which means wide bid-ask spreads, poor liquidity, and the potential for overpaying/underselling. I accept the slightly higher ERs for SPY and QQQ so that I can save even more on my hedging.

[blue_green_sparks]

I am FIRED and my long term CDs and bonds provide all my income needs but I am worried about my stocks. I took some money out of my index funds and bought several classes of "Innovator defined outcome "buffer" ETF's" that track index funds and provide downside buffering (9,15 and 30%) along with upside caps. If the ETF ever tanks you own the options. You can trade like any ETF and they reset once a year. The fee is kind of high at 0.79.

I ran the past 20 years S and P results against them and the 9% actually beat the 20 year average if they track, including the expense.

[soccerluvof4]

I like some of those ideas. Thanks and I totally forgot about the QQQ's. @bacchi I will be Fire'd going on 5 years in April so to some degree its more about preservation. I like what your saying but back many years when I use to try and be a day trader I never really understood exactly what your doing. I will look into that more as well. I have more than enough in Cash and CD's currently probably to much is why I am looking at other options then putting it to work in my existing portfolio and though maybe some if even a small percentage with as everyone agrees the Market being high might not be a bad play in the shorting of it. Not huge into Gold. But I will research what you have all suggested so far best I can. Thanks.

[MustacheAndaHalf]

What happens if the stock market returns a lower than normal 5% / year for the next several years?  That beats bonds, and ruins a shorting strategy.  Even studies of future returns from a high P/E starting point don't say how the lower returns are delivered.

When you "short" something, you pay another person to exit the market, with the promise you'll buy back in for them at a later time.  You can do that yourself: you could sell some of your equities now, and plan to buy back in later.  The problem in both scenarios is a rising market, which is what the market tends to do most often.

[bacchi]

A different choice that was discussed in another thread:

Take an ETF, like SPY, and use that value to buy a 1-2 year T-note or T-bond strip. That'd be about $32k as of today.

Buy a slightly OTM call on SPY and sell a further OTM call, creating a debit spread, 1-2 years out.

Now your $32k is guaranteed and you get some part of any market increase.


Downside 1: If the market has a 30% gain, like it did in 2019, you "lose out" on much of that gain.

Downside 2: If they're American style options, which most are in the US, you can be called out anytime, which could throw off your tax plan for that year with unexpected gains. To avoid this, some of the futures/index options are European style (RUT index has long-term options).

[Buffaloski Boris]

Is it just me, or is this a Sequence of Return Risk issue? Several ways to address that. In my case, I’ll probably start retirement with a lower equities allocation and gradually increase it.

I kind of like the idea of using derivatives but wonder if you can achieve more or less the same thing just by varying your asset allocation over time.

[ChpBstrd]

Is it just me, or is this a Sequence of Return Risk issue? Several ways to address that. In my case, I’ll probably start retirement with a lower equities allocation and gradually increase it.

I kind of like the idea of using derivatives but wonder if you can achieve more or less the same thing just by varying your asset allocation over time.

I think there are two issues with using AA to address SOR risk:

1) Holding a significant allocation of treasuries yielding 2% is not going to do much to help the survival of a portfolio with a 4% WR. I mean, it may be better than cash, precious metals, or internet collectibles like bitcoin, but the purchasing power of your portfolio will be a lot smaller a few years from now.  Years ago, when the Trinity study and most other AA research was done, treasuries were yielding 5-7%. Nobody could imagine 2%, so the general advice was to diversify your AA with treasuries yielding 5-7% and to withdraw 4% per year. The basic assumptions behind that advice no longer apply because the yield is less than the WR.

2) The current climate is being called the “everything bubble” for a reason. Equity valuations, bond prices, real estate prices, junk bond prices, treasury prices... everything is sky-high compared to historically normal ranges. As investors who lived through the dot-com and housing crashes remember, when enough people lose money on any one thing, everything else must go down too. Margin must be covered, portfolios must be rebalanced, stop loss orders are triggered, and risk appetite in general disappears. What’s not overpriced? Options. Because option prices are calculated by and arbitraged by computers, they are highly efficient. Any mispricing is arbitraged away in an instant. Options are not as subject to “animal spirits”. So with derivative-hedged stocks, one gets the opportunity to ride the “animal spirits” as high as they will go and then at the correction catch one’s fall on a perfectly reliable cushion, rather than hoping for assets to move opposite directions. There’s no sign any of these overpriced assets will outperform when another falters.