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Follower ○○

ideas for downside protection

Not sure where to post this, since the topic seems to straddle many of the forum boards...

We are within a couple of years of retirement, and interested in reducing the risk associated with our equities allocation.  We are more interested in asset preservation than growth at this point.  Equities are currently at approx 55% of the portfolio, and I would be reluctant to move it much lower than 50%, although do welcome all insights. 

Random web surfing has suggested some ideas, and I'd appreciate hearing your thoughts:

-if we are already at 45-50% in bond funds, especially if short term, we already have enough protection from a fall in equities

-put a big chunk of the equity portion into a stable value fund

-put a big chunk of the equity portion into a preferred stock (or convertible bond) fund or ETF

-put a big chunk of the equity portion into a closed end fund, because (for some reason?) they are more stable

-use leveraged inverse funds/ETF for a portion

Thanks for your insights

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Frequent Contributor

Re: ideas for downside protection

I’m in a similar situation, retiring at the end of 2021. But we’re different in that we are more “comfortable” with risk, we have a large portfolio, and a significant “chunk” of our money will go to heirs/ charities.

When I think of “safe” assets, I lean towards higher quality bonds- a mix of government bonds and investment grade corporates. Something like VBILX. Another option is a “stable value” fund for a portion of the “bond money”, especially if the fund has a higher yield.

I personally would NOT lower my equity percentage below 50%, equities are where “growth” will occur. So I want the growth through retirement, I don’t know your ages but we’re still in our early 60’s, I will retire at age 63. We could easily live 30 (or 40?) or more years. Putting a portion of the “safer” side in preferred stocks is another option, but I would NOT put too much there as they are still STOCKS, and thus more volatile than higher quality bonds. Don’t have enough experience with Closed end funds, so I’ll leave that for others.

Inverse funds, leveraged inverse funds-> NO WAY! Unless you have the ability to “predict” a selloff, which I sure don’t! 

Win
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Participant ○○

Re: ideas for downside protection

There are 2 ways that investors generally lose out.  Short term and long term:  Market fluctuations and Inflation.

Bonds; the safest assets are currently returning significantly less than inflation.  So, you really won't be preserving those assets in real terms over longer time periods.

Taking on more risk thru equities or leveraged CEFs will help you avoid the long term risk of inflation, but will exchange that for the shorter term risk of market fluctuations.  

So, do you wish a guaranteed long term permanent lose or unpredictable short term losses?

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Frequent Contributor

Re: ideas for downside protection


@Scrivener wrote:

We are within a couple of years of retirement, and interested in reducing the risk associated with our equities allocation.  We are more interested in asset preservation than growth at this point.  [...]

Random web surfing has suggested some ideas, and I'd appreciate hearing your thoughts:

 


Don't know if you are looking for specific fund suggestions to reduce "the risk associated with our equities allocation"?

If you are, you may want to check out ARBIX, a market neutral fund with a low SD of 2.87, along with an excellent YTD total return of 6.15% and a three year return of 5.4%. Except for a 3.1% loss during the recent March market crash, the fund's largest monthly loss during its three year history was 0.38% in November 2018.

Good luck,

Fred

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Frequent Contributor

Re: ideas for downside protection

One should spend a lot of time to put in a prudent asset allocation based on one's time horizon (when one needs the money) and on's risk tolerance.  If enough homework is done in this development, very little adjustment (e.g., rebalancing) is needed along the way into retirement and during retirement.

I am fearful of the words "put a big chunk of the equity portion into..." if one already has such a prudent asset allocation in place. 

Not that clear about your purpose and plan?

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Participant ○○

Re: ideas for downside protection


@3M wrote:

There are 2 ways that investors generally lose out.  Short term and long term:  Market fluctuations and Inflation.

Bonds; the safest assets are currently returning significantly less than inflation.  So, you really won't be preserving those assets in real terms over longer time periods.

Taking on more risk thru equities or leveraged CEFs will help you avoid the long term risk of inflation, but will exchange that for the shorter term risk of market fluctuations.  

So, do you wish a guaranteed long term permanent lose or unpredictable short term losses?


I'm not sure I agree with your assessment. EDV has a annual total return average over the last 10 years of 10.50%.  EDV comes with a high level of volatility so it is best paired with equities but IMO a better investment than leveraged CEFs.

helmut

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Explorer ○○○

Re: ideas for downside protection

To Scrivener:

 It is obvious that you are not keeping up with changes to your portfolio [no offense intended] and making the necessary changes that are always required with the changing markets. I noticed that Helmut [last post on this subject] mentioned EDV [used as a example only ... no offense intended] and I will use this as an example ....

https://tinyurl.com/yygv5lbj 

 Using the chart shown, we would have sold this security a few month's back for cash or something better....

 Bottom Line: The market will always be in continuous change and we are REQUIRED to protect our portfolio's risk [and investment dollars] accordingly [IMHO]. Changes to our portfolio could sometimes be required weekly because of sector changes [oil and Health sectors are shown to be out of investor favor currently]....

 Disclosure: My retirement portfolio is Dividends first [>10% cashflow] along with CapGain secondly [5%]. Goals and objectives are 10% dividends  + 5% CapGains =15% each year]. Currently because of market conditions, I am currently at 10.40% dividends + 13.55% = +23.95%. I have 26 securities in portfolio with 22 CEF's....

 Reference Point: My best performing dividend security is RIV [15.06% cost to yield price] and best CapGain security has been GLQ at $2592.00 ....

One single opinion of the many I am sure....

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Participant ○○

Re: ideas for downside protection

Value + Cash + Metals + Diversification. Downside protection is best achieved when buying investments when valuations are low (CAPE is below 20). So if you invested a decade ago you'll have some built-in protection. Cash and metals are a good hedge. Inverse funds are only for short term plays. Protective puts offer downside protection. LEAPS are long term puts for funds. Options can be expensive. Being well-diversified is a no-brainer.

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Frequent Contributor

Re: ideas for downside protection

Best advice is taking time to learn as much as possible about the best investment strategy for you. Anything that I would tell you is more talored to my needs and reflects the past.

I did well with managed large cap growth fonds mised with moderate balanced funds and bonds. Hard to say if past performance predicts future performance. 

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Frequent Contributor

Re: ideas for downside protection


@3M wrote:

There are 2 ways that investors generally lose out.  Short term and long term:  Market fluctuations and Inflation.

Bonds; the safest assets are currently returning significantly less than inflation.  So, you really won't be preserving those assets in real terms over longer time periods.

Taking on more risk thru equities or leveraged CEFs will help you avoid the long term risk of inflation, but will exchange that for the shorter term risk of market fluctuations.  

So, do you wish a guaranteed long term permanent lose or unpredictable short term losses?


So, what is your solution to the OP which represent a good portion of retirees?

(link) Over the last 12 months, the all items index increased 1.3 percent before seasonal adjustment.

Are you saying I can't find bond funds which will beat 1.3%?

Are you saying the only options are stocks + cash/MM/CD?

Please explain

===================

If you are looking at worse case scenario such as the black swan we had on 03/2020 you will not make the best decision.  Only treasuries held the best

Several ideas: 1) VBILX - good cheap VG fund with higher rated bonds at 50/50 treasuries/corp   2) PTIAX- a reasonable risk fund with about 4% yield. 

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Participant ○○

Re: ideas for downside protection

Long duration bonds, such as EDV have benefited from generally lowering interest rates.  

The Bankers have been purposefully lowering rates in an effort to revive the economy.  Rates are about as low as they can go.  Interest rates on long term Gov't bonds are below the expected rate of inflation.  So, after adjusting for inflation, the future returns of extended duration bonds, such as EDV is negative.  If rates go up, then returns will be even more negative.

Past performance is no guarantee of future returns.

That is especially true of long duration bonds.

30 Year TIPs.jpg

 

5 Year TIPS 2018-2020.jpg

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Participant ○○

Re: ideas for downside protection

FD;

What I'm saying is that there was a fundamental shift in real long term rates this past summer.

While real short term rates have gone negative in the past, longer terms have not.

Investors (and institutions) looking for "safety" will not be able to find it over longer terms.

Maybe someday, we will return to real long term positive rates, but don't hold your breath waiting for that.

The OP is asking for Unobtainium.   The thing is, he's not the only person either.

Unobtainium.jpg

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Follower ○○

Re: ideas for downside protection

Thanks for all the replies and interesting dialog so far. My responses:
-Apologies if part of my question was unclear. My non-equity side is what I consider my "safe" side. I am fairly comfortable with with my investments within that half. It's a mix of TIAA traditional (guaranteed 3%, "only" risk is if TIAA defaults), stable value funds, and some bond funds. I was trying to focus these questions on just the equity portion.
-there was an error in my original post. I meant to as about "defined outcome ETFs" instead of "stable value funds". Yeah, those are pretty dissimilar...
-At some point I will have to shift the mindset for our retirement funds away from accumluation and instead into using it for income. I was going to address that topic in a separate set of questions, but for now would be curious as to whether people think that shift (I am assuming it leads to a change in the portfolio, e.g., to get dividend streams or ...) needs to happen a couple of years before the retirement date, or if it is done right when retirement starts
-On the equity side, I am willing to give up some upside potential, in order to reduce the downside risk. Given that I am willing to make that trade off, I don't understand why that is "unobtanium". Isn't that what defined outcome ETFs, market neutral funds, etc. all try to do?
-while I didn't originally ask for specific fund recommendations, I do find them helpful. ARBIX is interesting.  I see PTIAX and VBILX as being more interesting for the non-equity portion, but perhaps I didn't understand why they were referenced

-I do have an asset allocation (e.g., 50% equities) and I am just considering whether that should really be primarily broad market index funds (plus Contrafund) at this point, if I am trying to reduce risk in the equity portion.
-I agree that I am not reacting to the market as frequently as some of the respondents. I am more in the category of buy/hold and re-balance a few times a year. Doing more (no offense) seems like I am market timing and/or fighting the people who do this kind of thing (e.g., pick sectors) as a full-time profession.
-LEAPS are something I had never heard of previously. I think I'd have to get a lot smarter on that topic before giving them a try

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Contributor ○○○

Re: ideas for downside protection


@Scrivener wrote:

<snip>
-On the equity side, I am willing to give up some upside potential, in order to reduce the downside risk. Given that I am willing to make that trade off, I don't understand why that is "unobtanium". Isn't that what defined outcome ETFs, market neutral funds, etc. all try to do?
<snip>
-I do have an asset allocation (e.g., 50% equities) and I am just considering whether that should really be primarily broad market index funds (plus Contrafund) at this point, if I am trying to reduce risk in the equity portion.
<snip>

@Scrivener,

You may want to consider regular equity funds which have lower betas and greater downside protection.
Some examples off the top of my head are Parnassus Core Equity Fund (PRILX) and Vanguard Dividend Growth Fund (VDIGX).

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Explorer ○

Re: ideas for downside protection

How about a portion in a fund that has low correlation to stocks and bonds. There are recent threads on TMSRX (T Rowe Price Multi-Strategy Total Ret Inv) and some of it's competitors on this board. I have bought some, from my equity portion, for the purpose of trying to dampen volatility. I am not sure if that is exactly the same as your stated purpose of downside protection but it is certainly similar.

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Follower ○○○

Re: ideas for downside protection

I’ve posted elsewhere about this as well, very intrigued by Charles Bolin and David Snowball’s articles in MFO and SA. I purchased SWAN for this purpose, and have DRSK, NUSI, PHDG on my watch list.  
I’m also looking at alts for lower vol, non-correlated funds, but am hesitant due to the black boxes inherent in these hedge fund-like strategies. Looking at TMSRX and other alt mutual funds. Gold also is tempting.

Best of luck!

Rick

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Follower ○○

Re: ideas for downside protection

thanks to all for the thoughts on beta/volatitility (which does seem to be one way to look at downside protection), and the specific funds mentioned as examples. I am looking into them.

I am also curious as to whether people have looked into the something "buffered" (e.g., SPRO, USEP) or are aware of any analyses of how they would have fared historically.

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Participant ○

Re: ideas for downside protection

I spent the better part of April/May searching out the best "lower risk" funds to reduce the overall risk of my total portfolio.  This thread was part of that research and you may want to go check it out.

I'll tell you where I made some investments from low conviction strategies to high conviction strategies and why:

  • Small allocation to gold miners -- gold is not a reliable stock market hedge and an arguably tepid inflation hedge, but it is certainly uncorrelated so it might end up working out (or might not).  I view this as a low conviction strategy but it's also a small allocation with a mild amount of income -- it has had immense capital appreciation since April, so that's nice.  But I would wait for a bigger pullback before jumping in if you go this way. YMMV.
  • Managed Futures: (LCSAX) -- most of these types of funds I think are expensive garbage.  This one is expensive, but not garbage.  It is a long/short commodities strategy that doesn't have a long or short bias so it ends up beating to its own drum.  Time will tell if its expense ratio makes up for its modest returns.  Like I said, low conviction.
  • Long/Short Equity Funds with neutral biases:  I was looking for funds that are not long biased, making them truly more market neutral.  I settled on RLSFX because it was one of only a few that survived March.  Medium conviction, but unfortunately ALL these funds have manager risk.  Will dump at the sight of trouble.
  • DRSK -- this is an interesting--but new--risk managed fund that uses a strategy I understand so I felt more comfortable it -- it's a barbell strategy of primarily a corporate bond ladder combined with a small allocation to call/put options on equities for capital appreciation.  Again, one of the few of the so-called "risk managed" funds that actually lived up to its billing in March.  Unknown whether rising rates will impact this strategy, although I suspect the laddering may mitigate it (we'll see...)
  • JHQAX -- this is a simple, but effective, fund that does all the work of buying the quarterly put options for me on the index while mostly otherwise following the SP500.  Again, great performance in March when put options shined.  I don't consider this fund "cheap" but I'm paying them for the work I don't feel like doing of buying put options myself to cover my allocation to U.S. large cap equities. It offers impressive risk-adjusted returns -- but the nightmare scenario for this fund is a long, slow sideways or declining market -- the expenses will eat your capital alive.  So understand its utility.
  • CDC -- for my dividend portion this is the only large cap dividend fund I could find that actually goes to cash in a market downturn.  Whoa!  I like rules, and its yield is not half-bad and it's not terribly expensive to boot.  Again -- survived March.  
  • Oh, and I should mention merger arbitrage.  I've been invested in MERFX for so long I forget I own it.  This is a well-managed conservative fund that occasionally hits singles and doubles.  It is extremely risk-averse and has survived each of the three downturns I've experienced.  Keep expectations moderate for growth potential, as they don't take big risks.  But out of all the so-called "alternatives" out there that just take your money, merger arbitrage has been tested for many years.  The issue is that too many people do it so it's hard to make a bunch of money from it.  This active fund is again, expensive, but I experimented with the "passive" MNA index ETF and just found it more susceptible to equity gyrations.

Finally, I also added a few proven low volatility funds to balance out my other equities and found the iShares line seems to have the best proprietary formula: EFAV and SMMV.  The rest of the low-volatility sector is not very impressive (I sold a few after the crash showed me their true colors) -- and unless there is a "cash-in-crash" mandate absolutely none of them will escape a mass-selling market event, but it will soften the more run-of-the-mill volatility

Ok, I've written way too much but that's where I landed for now.  Like with most "newer" strategies I experiment with low allocations for a period of time and continue to do my due diligence on the fund performances.  If interest rates were more rational, I would just dump it in long-dated treasuries and forget about it.  But. That's. Not. Now.

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Frequent Contributor

Re: ideas for downside protection


@3M wrote:

FD;

What I'm saying is that there was a fundamental shift in real long term rates this past summer.

While real short term rates have gone negative in the past, longer terms have not.

Investors (and institutions) looking for "safety" will not be able to find it over longer terms.

Maybe someday, we will return to real long term positive rates, but don't hold your breath waiting for that.

The OP is asking for Unobtainium.   The thing is, he's not the only person either.


The OP is about a solution.  So far you didn't offer any.

So again, are you saying there is no solution? are you saying invest everything in stocks, bonds, MM/CC?

 

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Follower ○○

Re: ideas for downside protection

Thanks for sharing all that research and rationale...and typing.    I am going to explore a bunch of those further.

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