And the volatility goes off the charts again.
Just seeing what folks are doing and thinking.
I spent Friday convincing several clients to stick with their
asset allocation plans (most of them pretty moderate).
Then the downgrade and now more downside movement in the
equity markets as well as - get this - further drops in
the treasury yields (meaning that people are *buying* more
treasury bonds in the wake of the downgrade).
David S Meyers CFP writes:
Trying to decide when...
(a) ...I'm willing to log into my account and see what's
happened since I last looked at it Thursday. 1/2 :)
(b) ...to rebalance back to my 60/40 equities/ST bond allocation
from wherever it is now (which of course requires (a) :)
it is not really right to say "in the wake of the downgrade". It is really
in the wake of realizing there has been no cut to government spending and
debt will continue to rise. That, plus bad economic numbers (no surprise),
so people are dumping equities and putting the cash someplace.
On Mon, 8 Aug 2011 14:47:00 CST, "Pico Rico"
No cut in government spending? How about no increase in revenue from
their historic low's? It's about time the people in this country pay
for what they want. That includes the wealthy and corporations.
On Tue, 9 Aug 2011 13:35:43 CST, "Pico Rico"
The people you think don't pay taxes, support the wealthy by spending
every penny they make on goods and services the wealthy offer. Let's
see how many companies hit the skids when those so called non tax
payers can't afford to buy their goods any longer. By the way, When
ALL taxes are taken into account, nearly everyone pays the same over
all tax rate.
======================================= MODERATOR'S COMMENT:
Please try to steer this back towards financial planning issues.
It will continue to from time to time in the coming decades.
That Jeremy Siegel is right that my dividends will be buying stocks at
bargain prices in the coming days and possibly months.
Company earnings look strong. It is too early to call this anything
but a momentary panic right now.
I think this may push Congress to be more responsible in budgeting,
including raising taxes.
When acquaintances ask me about stocks, I ask whether they can
psychologically weather a 20% or so downturn and whether they can
stick with their stock purchase for at least seven or so years. Do
they "get" that purchasing a well-diversified portfolio of stocks
reflects a belief that the world's economy expands via technological
improvement; improvement in the standard of living; populations
growing; demand rising? If not, then they should not buy stocks.
My understanding of volatility is variance about the mean. The VIX or
"Volatility Index" measures down moves only. Has anyone here gotten
interested enough to do the math, such that they can explain the
actual computations? It just irks me to see another mis-named thing
that people come to believe represents the name. Intuitively, I guess
the computations for the VIX are truncated or massaged such that the
index moves high on down moves, but reverts to an artificial smoothing
to zero when the markets shoot higher, more like an oscillator than a
variance. I didn't learn how to compute a one-sided variance.
The way the VIX is set up, if a normal trading range over five years
was 1% plus or minus, then the SP jumped 15% (up) in one day, the VIX
would plummet, and you'd hear "... well, volatility is certainly
down!" That's not the statistical definition. What am I missing here?
I kicked myself for not following my hunch posted here a month ago,
which is to recognize vol was near a historic low and to invest in etf
VIXY, which has since risen about 60%. But like I had said, those long
volatility etfs don't track right except over short periods, so I
guess you normally would bleed money waiting longer for reversion to
What I did was opportunistic harvesting of tax losses. Some recent
defensive purchases were slightly lagging SP500 on both up and down
modes, so I traded them in for better performing etfs on very down
days. Cancelled out about a third of my taxable gains, in a year where
I will be hit hard for roth IRA conversion costs. Like I had posted
earlier, this can be efficiently done with a one-triggers-the-other
trade order (sell to buy).
I am kind of paralyzed from actually changing my asset allocation. I
don't think it's bad to respond to cycles - a smart person can either
play contrarian or pro-cyclical and take advantage of change, but
things seem too novel for me to respond to yet. It seems the trade
machines are in charge rather than actual people, so I can't rely on
detecting and taking advantage of market psychologies as much as
I cooked up my own volatility index based on the adjusted returns of
VFINX (including dividends). It's pretty noisy, but you can clearly
make out Black Monday, the Dot-com Bubble, the Great Recession and the
If you're interested in how this is computed: For every 30-day period,
I fit a line to the log of the adjusted returns. Then I computed the
RMS about that line. The RMS is plotted against the last day of the
I'll play around with some other periods. I know VIX is based on a 30-
day period, but it's also based on futures, which is why it's a lot
Thanks for your reply and chart. That's impressive. It does clearly
show various noted market events, and it goes back far enough to
provide a useful comparison. I notice that your picture shows average
volatility looks a bit over 1%. That's more useful than VIX (e.g. 30?
25? OK, 30 and 25 what??). From your chart, I know that when the
market moves by over 2% in either direction, it's above average, and
that 6-8% moves are pretty much pushing the envelope. Is my
interpretation correct? If the market moves by over 2% a day as it has
been doing recently, how would that show up? That is, a 2% move once a
month might be more normal than a 2% move for five consecutive days,
so do consecutive days show up as cumulative volatility or does it get
smoothed? What is RMS?
I missed something in statistics, so please be aware that if you throw
regression analysis at me ... I don't know where the starting point
is. The squares part, I get, I just can't dope out how you get a line
fit to the scatter diagram. I use a ruler and a best guess. My excuse
for being regression-line illiterate is that my interest in statistics
waned seriously after discovering surveys are done with pre-fabricated
questions which are often completely brainless and biased.
i was watching jon stewart (imo a better source of info then actual
"news") he had John Coffee Director of the Center on Corporate
Governance at Columbia University Law School on. coffee's point was
that the rating agencies were corrupt and being payed by the the
people they rated. a person like me finds that very easy to believe
given the bad track record of the rating agencies before the housing
so i ask myself if this recent downgrade means anything at all and
should i pay any mind to these ratings in genreral? in wish i had the
skills and training to do an analysis myself. to just look at the
numbers while being detached from the propaganda out there.
personally i haven't touched a thing in my portfolio. if us bonds are
risky they have been risky for some time.
The main complaint I hear now is that agencies are overcompensating
with extra negative ratings in order to combat that suspicion.
After the downgrade, didn't the value of US tbonds jump up (and sell
well)? I heard an S&P rep blame the theater in DC, but wiser heads may
think that was a good exercise that would have benefited countries
like Greece to have had such a discussion of expenditures vs growth. I
think the parties on both sides hid the fact a default was almost
procedurally impossible and US bondholders can be paid forever, even
with no raise of credit limit. The brinkmanship was falsely pretended,
so that the US politicians wouldn't just kick the can as the Euros do.
One danger S&P is pointing to is inflation impacting US bondholders if
budget isn't finessed. Cutting expenditures or especially raising tax
rates can cut the tax base, and cause the gov't to print dollars to
pay bills. We had some family bonds cashed in for almost nothing in
the Carter years when interest rates were near 20% but these bonds
were around 3% - you have to lower the cost to a buyer so they get the
equivalent of 20% or whatever. It doesn't help to hold to maturity
since inflation erodes anyway.
Below I post a 2 year chart I use to watch price action of various
bond types. Until recently 20 year tbills had the worst results (zero)
and were pretty volatile. In the last few days it has swapped places
with high yield which went to zero and popped tbills up about 10% (the
yield difference would be an equalizer though). Emerging, corporate,
and TIPS cruised gently up pretty steadily, but I don't know the tips
yield after recently going below zero. Excuse the crazy bounds of
financial preferred - I like a bronco ride, especially when the yield
is almost double digit (and with safety of preferred creditor).