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Moustaches

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« on: September 11, 2015, 12:53:34 PM »
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« Last Edit: August 17, 2017, 11:28:51 AM by Moustaches »

forummm

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Re: Short S&P 500 with Emergency Fund
« Reply #1 on: September 11, 2015, 01:40:06 PM »
2 big things wrong with that are that when the market is going up (i.e. most of the time) you are losing money from your emergency fund. Another is that the inverse ETFs also have high fees, so you're losing even more money than just the market gains. I think you also go negative the amount of the dividends on top of that.

If you are going to have an emergency fund, it should go in a FDIC insured savings account or CD. The most risky but still OK thing would be in a treasury bond fund. That will usually go up when the market tanks. But you do have interest rate risk added if you go that route.

J Boogie

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Re: Short S&P 500 with Emergency Fund
« Reply #2 on: September 11, 2015, 01:43:26 PM »
Interesting idea.

I think the potential downside is that your emergency fund will just shrink and shrink over time, to the point where even during a downturn you'd barely be back at your cost basis.

In general I think hedging can be kind of pointless (why wouldn't you just buy less of stock A rather than buying some of its inverse as insurance?) and my guess is that logic holds up here as well.  I think you'd probably be better off holding onto some cash.

However, one thing that has me scratching my head is the idea of investing in a dividend play like HYG while holding its inverse, SJB.

Given a dividend of ~5% from HYG, wouldn't you effectively have a guaranteed ~1.55% overall return by holding equal amounts?  Or is there something I don't know about the nature of inverse ETFs?

Edited to account for .95% fee of SJB.
« Last Edit: September 11, 2015, 01:45:32 PM by J Welterweight »

seattlecyclone

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Re: Short S&P 500 with Emergency Fund
« Reply #3 on: September 11, 2015, 01:46:19 PM »
I don't think this plan makes sense. When you hold both long and short versions of a fund, you're literally betting against yourself, and paying expense ratios to two funds to do it. You want to diversify into different asset classes that are minimally correlated with each other, not into a short fund that is perfectly inversely correlated with your other investments.

forummm

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Re: Short S&P 500 with Emergency Fund
« Reply #4 on: September 11, 2015, 02:02:15 PM »
When the market is going up, you don't need an emergency fund though as you can cash out your high priced investments.  Duly noted on the fees but in the entire investment universe there has to be something with low fees that is inversely correlated with the S&P 500.  But you are right in that this probably would only work in the short term because if you look at the long term SH chart it's pretty scary.

On the last post, the purpose of the SH investment is not to have diversified growth, but downside protection.

Cash is really great at downside protection.

CanuckExpat

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Re: Short S&P 500 with Emergency Fund
« Reply #5 on: September 11, 2015, 02:10:07 PM »
For the most part the bond / fixed income portion of your portfolio should be providing this function shouldn't it?

Aphalite

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Re: Short S&P 500 with Emergency Fund
« Reply #6 on: September 11, 2015, 02:26:03 PM »
Cash is really great at downside protection.

+1

El Marinero

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Re: Short S&P 500 with Emergency Fund
« Reply #7 on: September 11, 2015, 02:27:38 PM »

Cash is really great at downside protection



Sometimes the answer is right in front of you - no need to make it complicated.
« Last Edit: September 11, 2015, 02:29:32 PM by El Marinero »

seattlecyclone

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Re: Short S&P 500 with Emergency Fund
« Reply #8 on: September 11, 2015, 04:33:05 PM »
On the last post, the purpose of the SH investment is not to have diversified growth, but downside protection.

Let me explain further. If you short sell one share of VTI in your "emergency fund" and use the proceeds to purchase a share of VTI in your "investment account," you basically own nothing. You own one share and owe one share. If the price goes up a dollar per share, the value of the share you own goes up by a dollar and the value of the share you owe also goes up by a dollar: it's a wash. There is no scenario where this will be better than simply holding cash out of the market, and it will in fact be slightly worse because you're paying the very small expense ratio on the share you own, plus margin interest on the share you owe.

For protection against downsides in the market, inverse correlation is not what you want. You want something that is relatively uncorrelated with market movements. Consider cash or bonds as a safer store of value.

hodedofome

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Re: Short S&P 500 with Emergency Fund
« Reply #9 on: September 11, 2015, 04:39:20 PM »
Would rather do tactical asset allocation for downside protection than hold a fund that loses money over time. If you are rich enough, tail risk 'Taleb' style funds work too.


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ChaseJuggler

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Re: Short S&P 500 with Emergency Fund
« Reply #10 on: September 11, 2015, 06:36:36 PM »
I use my $10,000 emergency fund to sign up for bank bonuses listed on the doctorofcredit site.  Takes some organization to pull off, but it's definitely less work than some of the other methods proposed here.

This year, that $10,000 has made me $550. A pretty good return!

Retire-Canada

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Re: Short S&P 500 with Emergency Fund
« Reply #11 on: September 11, 2015, 07:08:55 PM »
Assuming:

- $10K EF
- cash account gives 2%
- inflation is 2%
- stocks give 7% [on avg] after inflation
- LOC interest is 5% on a $10K limit with no home equity
- You have one emergency in 10yrs that you need $10K for 6 months to deal with

At the end of 10yrs:

- investing your $10K it grew to $16.3K
- holding cash as EF costs you $0, but loses you $6.3K over 10yrs
- cost of borrowing $10K on your LOC for 6 months $250 at the end of 10yrs you are ahead $6K
- bank cancels your LOC right when you need it and market is down 30% you cash in $10K of equities that costs you $4.3K over the $10K you put in, but over 10yrs you still end up ahead if you return the $10K to your investments after 6 months.

Just get a LOC that's not tied to home equity as your EF. Invest your EF $ in equities. The downside of holding cash is huge and it's 100% likely.


« Last Edit: September 11, 2015, 07:11:34 PM by Vikb »

Financial.Velociraptor

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Re: Short S&P 500 with Emergency Fund
« Reply #12 on: September 12, 2015, 06:42:09 AM »
This only makes sense if you are a stock picker instead of an indexer.  Plenty of hedge funds short SPY for leverage in their portfolios.

Also, using an inverse fund is a bad idea because of fees and tracking error.  Better to open a traditional short on a long fund or a double/triple long fund.

Jack

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Re: Short S&P 500 with Emergency Fund
« Reply #13 on: September 12, 2015, 07:28:12 AM »
Also, using an inverse fund is a bad idea because of... tracking error.

I'm glad to see someone mention this. So far, most of the replies have mentioned why an inverse ETF is a bad idea even if it really were perfectly inverse, but it's much, much worse than that because it most emphatically is not that! If you're holding an inverse (or leveraged) ETF for more than a day or two, you're already Doing It Wrong whether it's for the purpose of hedging or not.

See these articles for an explanation of why:

http://seekingalpha.com/article/104703-explaining-inverse-and-leveraged-etfs

http://soberlook.com/2009/08/inverse-leveraged-etfs-sober-look.html

http://www.forbes.com/2009/03/30/etf-tracking-error-personal-finance-etfs-vanguard-ishares.html

The last one is the least informative overall, but has the best one-sentence summary of the problem:

Quote
Inverse and leveraged ETFs are designed to replicate the daily performance or opposite daily performance of their underlying index. This means these funds effectively reset every trading day, potentially causing wildly unexpected returns for buy and hold investors who thought they were merely making an opposite bet on an underlying index.

YoungInvestor

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Re: Short S&P 500 with Emergency Fund
« Reply #14 on: September 13, 2015, 06:29:20 AM »
Let's say your emergency fund is 10% of your portfolio for this example.

Being 90% long sp500 and 10% short sp500 is worse (and more complex) in every situation that does not involve negative interest rates than being 80% long sp500 and 20% cash. Why not do that, then?

Jags4186

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Re: Short S&P 500 with Emergency Fund
« Reply #15 on: September 13, 2015, 07:15:09 AM »
Assuming:

- $10K EF
- cash account gives 2%
- inflation is 2%
- stocks give 7% [on avg] after inflation
- LOC interest is 5% on a $10K limit with no home equity
- You have one emergency in 10yrs that you need $10K for 6 months to deal with

At the end of 10yrs:

- investing your $10K it grew to $16.3K
- holding cash as EF costs you $0, but loses you $6.3K over 10yrs
- cost of borrowing $10K on your LOC for 6 months $250 at the end of 10yrs you are ahead $6K
- bank cancels your LOC right when you need it and market is down 30% you cash in $10K of equities that costs you $4.3K over the $10K you put in, but over 10yrs you still end up ahead if you return the $10K to your investments after 6 months.

Just get a LOC that's not tied to home equity as your EF. Invest your EF $ in equities. The downside of holding cash is huge and it's 100% likely.

I've done this on other threads, but the simple fact is that holding an EF in cash is NOT huge.  A 20k emergency fund held in a 1% savings account would cost you $133/mo in retirement income 15 years from now--assuming you get 8% returns on the investment you would have put the $ in.  That doesn't even take into account the fact you can do shifty things TODAY to push your return on cash to 4%, 5%, 8% or maybe greater if you're willing to do a little leg work and hunting for account bonuses.

Most people on this forum don't need an EF that big, so it's even less of a big deal.
« Last Edit: September 13, 2015, 07:17:09 AM by Jags4186 »

TheBuddha

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Re: Short S&P 500 with Emergency Fund
« Reply #16 on: September 13, 2015, 12:15:39 PM »
Just hold your emergency fund in Ibonds and consider it part of your bond asset allocation.

Kaspian

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Re: Short S&P 500 with Emergency Fund
« Reply #17 on: September 14, 2015, 01:46:05 PM »
To me this sounds a lot like strapping your home fire extinguisher to the back of your pet dog and hoping he's around if flames break out.  Not anywhere in the realm of prudent.

pru·dent (pro͞od′nt) adj. 1. Careful or wise in handling practical matters; exercising good judgment or common sense:

forummm

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Re: Short S&P 500 with Emergency Fund
« Reply #18 on: September 14, 2015, 05:11:23 PM »
My counter-argument to this is that you aren't buying 1 share of VTI and shorting 1 share of VTI at the same time and then selling them on the exact same day in the future.  I'm assuming you have a sizable investment portfolio and cash in an emergency fund, than you short the stock market, and if and only if an emergency happens, and if and only if the market has gone down, you then liquidate your short position, while never selling your investment portfolio, buying low and selling high.  But it doesn't seem to be a good method in the long term as your emergency fund will go down over time.

As for downside protection, in the short term it's better than cash as you actually get a return on your emergency fund if the stock market goes down.

It doesn't matter when you buy the VTI or VTI inverse, you're holding them both at the same time--betting in opposite directions and paying fees on top of that. It would be better under all circumstances to have the VTI and VTI inverse in cash instead.

Cash is better for downside protection. While the market is going up your emergency fund in a short sell is going down, so you have to keep pouring more money into it. The market goes up a lot more than it goes down.

But don't listen to us. Just try it out and see how it goes. Maybe that's a good way for you to learn what a bad idea it is.

ShoulderThingThatGoesUp

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Re: Short S&P 500 with Emergency Fund
« Reply #19 on: September 16, 2015, 09:16:22 AM »
To me this sounds a lot like strapping your home fire extinguisher to the back of your pet dog and hoping he's around if flames break out.  Not anywhere in the realm of prudent.

pru·dent (pro͞od′nt) adj. 1. Careful or wise in handling practical matters; exercising good judgment or common sense:

Installing bottle rockets in your walls instead of having fire insurance. If your house burns down, the proceeds from the awesome YouTube video will pay for replacement!

ivyhedge

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Re: Short S&P 500 with Emergency Fund
« Reply #20 on: September 16, 2015, 02:34:41 PM »
Just hold your emergency fund in Ibonds and consider it part of your bond asset allocation.


Agreed. We do this, in addition to high yield online savings (since the former is limited, sadly)...


In other news, please do not consider short ETFs unless you use them for a day: ONLY. You need to read their prospectuses. When you do, you will learn about time decay and why the vehicles are only intended as trading ones and not as long term hedges of any sort. In summary, even if (net of fees, so this is comical) the product were to move 1:1 against the long/opposite index, you will necessarily lose money because of the underlying options strategy. If you want to short, then short in the time honored tradition.
« Last Edit: September 16, 2015, 02:39:04 PM by ivyhedge »