Which is better, active or passive portfolio management?
This is a debate that was running pretty hot for the lovely cushion of a bull market Quantitative Easing & the Presidential cycle brought us.
Then we started pulling off the highs with aggression.
A ‘war’ threat with North Korea. Escalating tensions with Russia. Tariffs. Fed rate hikes.
In a (seemingly) over-extended market, pick a reason and you’ll start to see some selling as soon as panicked longs find a reason to get scared. MarketWatch was kind enough to state the reason for all this pullback was mere $VIX. Yet that makes no sense. At all.
Why $VIX Is A Silly Thing To Blame
That MarketWatch article is titled “The simple reason the Dow snapped a 9-quarter win streak: Wall Street’s surging ‘fear index'”.
Let us remember the formula for this magical fear gauge:
[ source: https://www.cboe.com/micro/vix/vixwhite.pdf ]
Long story short…it’s a put to call ratio on $SPX options out to ~30 days from expiry. So why did $SPX puts knock out the Dow? I have no idea. That article from MW makes no sense starting from the title.
Not many people trade in $SPX options…mostly due to their heavier pricing than $SPY options. Which makes $VIX highly manipulable.
Back To Active vs. Passive Portfolio Management
For investors capable of taking a heavy drawdown, it’s pretty obvious what you should be doing based on the historicity of markets. Bogle it; split your assets across a few well-priced index funds, some bonds, and some cash. Then just sit back.
Note that I said investors there.
I’m a hybrid; I have my buy and hold index funds and equity in individual names that I essentially never check or trade. That consists of around 40% of my portfolio, after bonds, cash and some short-term futures and FX trades, I keep my options portfolio around 20% of my portfolio size.
Due to the nature of options sometimes that grows beyond that % total level, at which point I wait for a nice time to take profits. Like the January-February period.
But as a trader primarily (strictly based on the volume of trades, not % of assets), there is no such thing as ‘passive’ portfolio management.
Options portfolios are akin to a species, in that
- They need to be nurtured as they reach equilibrium points.
- Survival of the fittest definitely applies.
- Transitively from above, they evolve.
But it’s an evolution you’re in control of. Your success or failures as a trader are your own fault.
Yes, the markets are rigged. Get over it.
But if you go with the flow of things and switch your habits, you can beat “Mr.Market”.
What that means is being a contrarian sometimes; when the news is beating up a name and think it’s unjust then don’t bother buying puts. Wait for your call entries.
Be in and out of shorter-dated option positions much faster in a high volatility environment. I’m a big fan of LEAPs, so I also take high volatility environments as opportunities to get into names or ETFs I like.
Take it from the now investor infamous “Bobby Axelrod”, of Axe Capital on the Showtime Series Billions.
He’s a hedge-fund manager. A very aggressive one who doesn’t really hold much of anything very long. So he’s more of a trader.
And if you’re trading rather than investing…unless you have the time to be fairly active, the balls to take on some risk and the intelligence/common sense to balance your portfolio with hedges….you should re-consider your apprach.
There is no total passive state for traders. I recommend you do both…or pick one based on your time allocation and how willing you are to see money burn at times (as well as how to handle those times effectively to minimize your losses).
Stay on your tip-toes here. I saw some indication in the options market of some short-term bullishness on the front side of the week. But follow your own rules and more importantly be safe with your capital.
Per my recent norm, today in history: April 3rd, 1948 – U.S. President Harry Truman signs the Marshall Plan into law.
“On April 3, 1948, U.S. President Harry S. Truman signs into law the Foreign Assistance Act, commonly known as the Marshall Plan. Named after U.S. Secretary of State George C. Marshall, the program channeled more than $13 billion in aid to Europe between 1948 and 1951. Meant to spark economic recovery in European countries devastated by World War II, the plan also saved the United States from a postwar recession by providing a broader market for American goods. However, because the USSR prevented countries like Poland and Czechoslovakia from participating, the plan also contributed to the raising of the “Iron Curtain” between Eastern and Western Europe.”
Fitting all things considered. History does indeed repeat itself.