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R48 Talks--Using a Hedge, PSTIX, PIMCO's Inverse Fund, in this Bear Mkt

 

In this bear market, I am using an inverse type fund, PIMCO's PSTIX, Stocks Plus Short, Institutional...which is designed to move in opposite direction of the market.  Market goes down 3%, it goes up 3%.  I use it to essentially neutralize part of my stock fund holdings.  So, if I sell out 1% of allocation in stock funds, and buy PSTIX, it is like removing 2% from market exposure.  I have been adding to it from 2-3 times a week, including last Thursday and Friday.  I expect to add more this week, if we get an expected market decline.  The advantage is you reduce your stock side exposure, without having to sell any stocks or stock funds you own.

A potential flaw is one can only buy at the market close.  However, in this market, it's been an advantage.  Many days the market has rallied like a thousand points, mostly at the closing period.  I buy some PSTIX.  Next day, the market OPENS DOWN 1000.  You can't actively hedge this that day because the market is already down.  However, PSTIX picked up the decline difference.  I typically buy at about 3:57 pm. 

This fund is not leveraged in my buy, meaning I need an equal amount of cash to buy.  In this bear market, for the first time, I am simultaneously exiting various bond funds, likely for years.  This cash buildup, instead of sitting in MM Funds, is being used to buy PSTIX.

I don't sell yet...just accumulating successful positions.  See PSTIX chart.  So far, so good.  But this is not for everyone; it requires market attention...and understanding.  Do not plan to hold long-term.  When finished, I will sell position, but keep a small toe-hold in Fund. 

You might ask, what if market goes way up, do you lose?  No, because while PSTIX will decline in price, an equal dollar amount of stock funds will have increased by similar amount.  It is neutral.  What if market goes down another 25%?  Then PSTIX gains, offset by the decline in stock fund prices for same amount. Neutralizing.

BTW PSTIX minimum initial purchase is $1,000,000.  But if you can't swing that, it can be had for $25,000 in a Vanguard IRA. :-),  FD1001 advised it can be bought for $100,000 minimum at Schwab.  Note you can buy the $25,000 min, sell shortly $10,000, resulting in a $15,000 position, if you desire only a $15,000 position.  I don't know if there is another same-type fund available at a lower minimum cost.

As usual, all readers are 100% fully responsible for their investing actions.

Good luck folks in navigating this bear market.

R48

 

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Re: R48 Talks--Using a Hedge, PSTIX, PIMCO's Inverse Fund, in this Bear Mkt

R48,

Are you pyramiding up? ;)

Real question, why are you hedging instead of reducing your exposure?

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Re: R48 Talks--Using a Hedge, PSTIX, PIMCO's Inverse Fund, in this Bear Mkt

I believe there are ETFs that do this for no minimum?

ProShares Short S&P500, SH

 

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Re: R48 Talks--Using a Hedge, PSTIX, PIMCO's Inverse Fund, in this Bear Mkt


@Fishingrod wrote:

R48,

Are you pyramiding up? ;)

Real question, why are you hedging instead of reducing your exposure?


I'll stick with cash rather than investing in PSTIX .

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Re: R48 Talks--Using a Hedge, PSTIX, PIMCO's Inverse Fund, in this Bear Mkt

I'm using SDS for hedging purposes.

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Re: R48 Talks--Using a Hedge, PSTIX, PIMCO's Inverse Fund, in this Bear Mkt

I assume you hold PSTIX until you are sure the market has bottomed and is on its way up, then you sell.  Otherwise, it's like placing one bet on red, another on black, in roulette.  You always break even, unless green 0 or 00 hit.

ElLobo, de la casa de la toro caca grande
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Re: R48 Talks--Using a Hedge, PSTIX, PIMCO's Inverse Fund, in this Bear Mkt


@Fishingrod wrote:

R48,

Are you pyramiding up? ;)

Real question, why are you hedging instead of reducing your exposure?


Good question.

Answer...my investing protocol is to do any stock fund selling, from between a break in 200 day Moving Average, and a bear market.  That is usually from peak, down 8%, to down 20% range.  That I already did.  Sold some weak sisters, such as the last vestige of any Energy Stock sector Holding.  I also sold some stock funds during January for my full year RMDs, per this post:

 "That I started preparations for taking my 2020 IRA Required Minimum Distributions, by selling some equity stock mutual funds.  Strategic sales...the first being just before the first corona virus news.  This virus-news triggered me to sell more...and more quicker, ending in a week.  2020 RMDs now covered. "   

Editor's note:  I somehow sensed in Jan that seemingly stocks MELTUP, combined with corona virus,may be big deal!

And sold some in February...through down 20% bear market territory.  My experience is that I hunker down/ride it out, then start rebuys from compelling values or pyramid Up buys.

But I kept a toehold in PSTIX, and used it to hedge during this bear market.  The post above on just using the S&P500 hedge (SDS)is intriguing , but it is a 2X fund (leveraged) which scares me some.  (See long term chart).  And also requires some fast decisions/maneuvering to buy or sell in final minutes of the day. I'm OK with a one-for-one hedge.

An advantage of any total market hedge is you don't have to select any individual fund(s) to sell.  This is cumbersome.

We had several threads about a decade ago on why PSTIX was viewed favorably, but I can't go back because M* has shut us out of older posts.  I would like to re-read reasons.  This bear market came so fast, I simply went quickly to PSTIX which I owned!

Any others have hedging experiences...post them.

R48

 

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Re: R48 Talks--Using a Hedge, PSTIX, PIMCO's Inverse Fund, in this Bear Mkt

PSTIX was down 7.09% for the past week per MarketWatch. Not sure I would care for that timing.

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Re: R48 Talks--Using a Hedge, PSTIX, PIMCO's Inverse Fund, in this Bear Mkt


@outandabout wrote:

PSTIX was down 7.09% for the past week per MarketWatch. Not sure I would care for that timing.


But look at previous weeks of gain.  It simply doesn't matter.  You neutralize the same amount of stock fund.  Stocks up 7%; PSTIX down 7%.  Stocks down 7%, PSTIX up 7%.  If stocks double from here, I lose with PSTIX but am quite happy to have my portfolio double.  If stocks go down another 30%, PSTIX saves me a bunch.

And yes, if I sense bear market is over, or market in an uptrend, I simply close out PSTIX position, with same portfolio holdings intact, and buy El Lobo a beer.

Am   I missing something, please shout out.

R48

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Re: R48 Talks--Using a Hedge, PSTIX, PIMCO's Inverse Fund, in this Bear Mkt

LOL, R48, I'm sure you're doing what's right for your portfolio. I just don't trade funds like they were stocks or ETFs.

I'm more inclined to get back into PIMIX.

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Re: R48 Talks--Using a Hedge, PSTIX, PIMCO's Inverse Fund, in this Bear Mkt

"but it is a 2X fund (leveraged) which scares me some."

Put half your investment into it as you plan for 1X.  Total returns are the same.

ElLobo, de la casa de la toro caca grande
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Re: R48 Talks--Using a Hedge, PSTIX, PIMCO's Inverse Fund, in this Bear Mkt


@ElLobo wrote:

"but it is a 2X fund (leveraged) which scares me some."

Put half your investment into it as you plan for 1X.  Total returns are the same.


You're technically correct.

But with a market move of 10% in a day, 2X is 20%, one has to be glued to the TV (not that I'm not lately).  Further these market moves are often coming mostly in last half hour.  Hectic.  I have active trader pro at Fidelity but don't use it.  Getting real time quotes etc is quite difficult with these high volumes.  limit orders are history as soon as entered.  With PSTIX I know at 3:58pm, click mouse, order placed on line.  Nap time.

R48

 

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Re: R48 Talks--Using a Hedge, PSTIX, PIMCO's Inverse Fund, in this Bear Mkt

@retiredat48 

But look at previous weeks of gain.  It simply doesn't matter.  You neutralize the same amount of stock fund.  Stocks up 7%; PSTIX down 7%.  Stocks down 7%, PSTIX up 7%

I understand the concept of hedging to lock in a profit for commodities when you have purchased futures in something like fuel or growing something like hogs, cattle or an agricultural product like corn.  I don't understand why you would buy 7% in PSTIX rather than just selling 7% in equities to reduce your risk in stocks. 

It seems to me that neutralizing is not the same thing as hedging.

helmut

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Re: R48 Talks--Using a Hedge, PSTIX, PIMCO's Inverse Fund, in this Bear Mkt

I would only use inverse funds if I'm very confident stocks will go down and for a short term.  Most investors can use TLT/EDV on a constant basis and leave it alone because long duration treasuries will go up when stocks go down but also will make you some money when stocks go up.  I would not go with adjusting my inverse position based on market condition, it's too complicated.

See 13 years since 01/2007  of 80/20 of SPY/TLT vs SPY/PSTIX  (link). The combo SPY/TLT made 2.3% more annually.

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Re: R48 Talks--Using a Hedge, PSTIX, PIMCO's Inverse Fund, in this Bear Mkt


@retiredat48 wrote:

@ElLobo wrote:

"but it is a 2X fund (leveraged) which scares me some."

Put half your investment into it as you plan for 1X.  Total returns are the same.


You're technically correct.

But with a market move of 10% in a day, 2X is 20%, one has to be glued to the TV (not that I'm not lately).  Further these market moves are often coming mostly in last half hour.  Hectic.  I have active trader pro at Fidelity but don't use it.  Getting real time quotes etc is quite difficult with these high volumes.  limit orders are history as soon as entered.  With PSTIX I know at 3:58pm, click mouse, order placed on line.  Nap time.

R48

 


True that 2X moves twice as much but again, if you have only 1/2 as much does the increased volatility have any more effect than holding the full amount of 1X?

I'm not really seeing the difference between 50/50 SPY/PSTIX and 100% cash for going neutral. Would you take it further to hold more PSTIX than SPY? (I use SPY to mean whatever general stock funds you own).

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Re: R48 Talks--Using a Hedge, PSTIX, PIMCO's Inverse Fund, in this Bear Mkt


@helmut wrote:

@retiredat48 

But look at previous weeks of gain.  It simply doesn't matter.  You neutralize the same amount of stock fund.  Stocks up 7%; PSTIX down 7%.  Stocks down 7%, PSTIX up 7%

I understand the concept of hedging to lock in a profit for commodities when you have purchased futures in something like fuel or growing something like hogs, cattle or an agricultural product like corn.  I don't understand why you would buy 7% in PSTIX rather than just selling 7% in equities to reduce your risk in stocks. 

It seems to me that neutralizing is not the same thing as hedging.

helmut


Fair enough helmut.  Perhaps we call it NEUTRALIZING.

The reason I don't want to sell equities is this is very cumbersome.  Like which ones, when you want to keep all?

Something doesn't seem right that I should sell my VWELX, owned since 1953, when I can use a quick alternative for a month or two.

R48

 

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Re: R48 Talks--Using a Hedge, PSTIX, PIMCO's Inverse Fund, in this Bear Mkt


@FD1001 wrote:

I would only use inverse funds if I'm very confident stocks will go down and for a short term. 

R48 reply: True.  It is not a combo-investment.

Most investors can use TLT/EDV on a constant basis and leave it alone because long duration treasuries will go up when stocks go down but also will make you some money when stocks go up. 

But not good in this market.  Bond 40 year bull market is over.  TLT fell out of bed, correlation going to 1 with this market.  Fed bailout recently stabilized TLT with billions in purchases, as hedge funds based on owning TLT are blowing up.

I would not go with adjusting my inverse position based on market condition, it's too complicated.

I haven't sold any, if that's what you mean by adjusting.  I agree, I don't do trading.  And with the thousand point Dow moves from previous close,  prior to market opens, trading is quite tricky.

See 13 years since 01/2007  of 80/20 of SPY/TLT vs SPY/PSTIX  (link). The combo SPY/TLT made 2.3% more annually.

OK.  But this is not a long term holding.  It is to be used when stock markets break down through their 200 day Moving Average...or go into bear market rules.  Quick, fast neutralizing of a percent equity in a portfolio.

R48 in bold.


 

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Re: R48 Talks--Using a Hedge, PSTIX, PIMCO's Inverse Fund, in this Bear Mkt

Yes, I shortened the time frame to cover the financial crises and it did a good job mitigating the downturn. I think the fund has its place in investment strategy, but this kind of fund takes some talent for trading to get it right. I'm saying it is not for everyone.

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Re: R48 Talks--Using a Hedge, PSTIX, PIMCO's Inverse Fund, in this Bear Mkt


@archer wrote:

@retiredat48 wrote:

@ElLobo wrote:

"but it is a 2X fund (leveraged) which scares me some."

Put half your investment into it as you plan for 1X.  Total returns are the same.


You're technically correct.

But with a market move of 10% in a day, 2X is 20%, one has to be glued to the TV (not that I'm not lately).  Further these market moves are often coming mostly in last half hour.  Hectic.  I have active trader pro at Fidelity but don't use it.  Getting real time quotes etc is quite difficult with these high volumes.  limit orders are history as soon as entered.  With PSTIX I know at 3:58pm, click mouse, order placed on line.  Nap time.

R48

 


True that 2X moves twice as much but again, if you have only 1/2 as much does the increased volatility have any more effect than holding the full amount of 1X?

reply: Technically the same.  Sure, it is an alternative.  I just find for me, in this market, buying or selling such a 2X fund is difficult.  One can also use a 1X, HEDG fund.

I'm not really seeing the difference between 50/50 SPY/PSTIX and 100% cash for going neutral. Would you take it further to hold more PSTIX than SPY? (I use SPY to mean whatever general stock funds you own).

I'm not close to 50/50 SPY/PSTIX.  

I would not have enough money available to hold more PSTIX than my portfolio stock shares.

Let's say one is 70/30 in January.   Through selling some things into market time of down 15% from peak (and really down through 200 day Moving Average), one might be 60/40...or 55/45.  Now to neutralize another 5 to 10%, use PSTIX.  You de-risked your portfolio down to 50/50 range.

Then hunker down!

R48 in bold.


 

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Re: R48 Talks--Using a Hedge, PSTIX, PIMCO's Inverse Fund, in this Bear Mkt


@FatKat wrote:

Yes, I shortened the time frame to cover the financial crises and it did a good job mitigating the downturn. I think the fund has its place in investment strategy, but this kind of fund takes some talent for trading to get it right. I'm saying it is not for everyone.


Agree.  I've been reluctant to even discuss this in the past.  But it works, and let's one sleep more at night.

From what I am hearing from posters they would just love to say: FREEZE IT, regarding their portfolio. No more downside.  PSTIX gives a way to accomplish that for awhile, for a portion of ones equity allocation.

I repeat...in this market I am getting cash to buy PSTIX, from selling bond funds, to which I have decided to leave many for likely several years.

R48

 

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