Where I Run When The The Market Trends Head South!

Today, investors are worried about a trade war!  Yikes, it sounds dangerous.

Look at the spreadsheet from Morningstar (above). You can see that at the open today many of the Risk On ETFs were down.  And the Risk Off ETFs were up.

See, as investors get nervous about the stock market performance they will move out of stocks and into Cash, Treasuries (IEF, TLY) bonds (AGG) and the yen FXY.  You can see they are all up this morning.  Folks move to these as are they are negatively correlated to the SP500.  Essentially they move up, when the market moves down.  Those that are more adventurous may short the market (perhaps with leverage) and use SH, SDS or SPXU. 

So by putting a certain percentage of your portfolio in inverse correlated holdings, you can hedge the market.

I have two software programs that track correlations.  They change over time.  Right now, 6-month correlations on SH, SDS, SPXU are -1.  And IEF, TLT, and FXY are -.35, -.20 and -.26, respectively. You could mix and match a few of these to create a correlation you are comfortable with for a percentage of your holdings. 

Every stock, bond and ETF and fund have correlations to the market.  Some are high, some are low.  As an example utilities (.29) have a lower correlation to the market than financials (.90)

As an example, if trends told you the market was going to go down 25% in the next 6 months. You could move some of your portfolios to cash.  And then move some of your portfolios to FXY and IEF.  And perhaps move some to SH.  Perhaps you could reduce your market loss to 15%,

The market is impossible to time and difficult to forecast.  But these are the tools I use when the intermediate and long-term trends are moving down.  There is some science to this.  There is some art.

Currently, our portfolio is 10.8% cash.  We have been there since the first of the year.  We do hold currencies and bonds.  But we have not moved to a more risk off position based on the current trends.  We do not currently hold IEF, TLT, FXY, SH, SDS, SPXU or AGG.  We have used them all in the past. But, we will only consider using them if trends change.

My advice to you.  Study the correlations of your holdings and make sure you are comfortable with them.  Or, better yet, ask your investment advisor to go through them with you.

Chris Vig is president of The Vig Company and is an investor, artist, author, business consultant and former CEO living in Monona, WI. This article is for entertainment purposes only.  Do you own diligence when investing your hard earned cash.