Here is an update on how I’m thinking about the PIP-VEVE strategy, in light of the recent market moves.
PIP-VEVE was designed to be the opportunistic part of your portfolio, while the main portfolio remains more tactical with more rules.
For that reason I am relaxed about what is going on with the VEVE purchase we made towards the end of February. However, the current experience has given me food for thought, should more “rules” be included?
One that I am considering involves “VIX” which reflects expectations for short-term volatility in the market. The question is should we use the VIX more deliberately in our decision-making? For example, if VIX is significantly above its 1-year average, maybe we hold back a bit? Or if it is below, buy with confidence?
But the recent averages don’t seem to be that helpful:
- Over the last month: 22 (a bit elevated)
- Last 3/6/12 months: ~17
- Last 5 years: ~32
It is difficult to discern from those figures what a decent long-term average is, and therefore if we are experiencing volatility that is above or below average.
When we bought VEVE in February, the VIX was around 19 – not an especially high reading.
Other thoughts have occurred in conversation, not least stop losses, or trimming positions to re-enter if things get worse.
For now, I have discounted them. It would mean being a “trader” not an “investor” and that is a perilous approach if you do not have the skills and temperament for it. And I do not.
Which returns me to the bigger picture – your PIP-VEVE investment is currently showing a loss, but this will prove to be temporary, it is a matter of time. For this cycle (unlike the five other cycles) the profit will be watered down due to the time it takes to recover. For this scenario to unfold one time out of six is acceptable I think.
Should conditions worsen further then we will look to your main portfolio.
First we will simply rebalance your portfolios again, and then if things get significantly worse from there we will cut bond holdings and buy more equities.
That has proved to be a profitable approach in the past and it will prove to be again.
In the 1970s legendary investor, Sir John Templeton, opined: "The four most dangerous words in investing are: 'this time it's different.'"
He is yet to be proved wrong.