Penn Wealth Publishing

2019.01.13 Penn Wealth Report Vol 7 Issue 01

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8 penn wealth Report volume 7 issue 01 13 Jan 2019 Penn Wealth Report Copyright 2019. All Rights Reserved. investment intelligence Other than hiding out in cash, what's an investor to do? At most points in the past, falling values in one asset class meant rising values in other, inversely- or non-correlated asset classes. For example, as markets were hitting their crest back in the spring of 2000, the target federal funds rate was sitting at 6.5% (it is at 2.5% now). at meant an investor could pick up 7-8% high quality corporate bonds till the cows came home. As the Fed began lowering rates to counter the softening economy, the value of those bonds went straight up. And cash as an investment? We recall 5% money market rates back around that time! Of course, one could also go into precious metals, agricultural com- modities, real estate, foreign markets, and other asset classes in an attempt to avert the imploding tech bubble. To get an idea of how an investor could have diver- sified away market risk back in the first few years of the new millennium, take a look at the accompanying graph. While the "new economy" NASDAQ was busy falling an almost-unfathomable 73.5% between March of 2000 and the end of 2002, the typical bond portfo- lio was going up nearly 32%. If you diversified into gold to hedge your market bets over that time frame, you would have been rewarded with a 20% gain. Fast forward to today. Markets are falling, oil is plummeting, gold is flat, rates are going up (mean- ing bond values will fall), and emerging markets are nightmarish. What about hid- ing out in the money market? at is certainly wise for a larger portion of your portfolio as the stock market tries to find a floor, but instead of 5% you will be rewarded with less than one-half of 1%. ere is one market strategy, however, guaranteed to generate positive performance (overall) as the markets drop: adding inverse funds to your portfolio. So, why don't more investors use this tool? Namely, it is fraught with danger and, barring a crystal ball, investors can get hammered before they know what hit them. So what are inverse funds, anyway? ere have always been ways for sophisticated traders to take the opposite side of any market bet; unfor- tunately, most of those methods were historically reserved for a privileged few. at changed with the advent and blossoming of the exchange traded fund. Today, any individual investor can buy any number of inverse funds to hedge against a certain long position. Let's use the NASDAQ as a classic example. Despite crazy and unsettling gyrations in the tech-heavy index during the first quarter of 2018 (up 8%, down 8%, up 8%), the NASDAQ rose 16% between the begin- ning of Q2 and the end of Q3. Suppose you had a bad feeling about the fourth quarter for tech stocks, and wanted to either protect your holdings or simply take advantage of another downturn. So, you picked up some shares of PSQ, the $517 million NASDAQ inverse fund, selling for $29 per share on the first day of the fourth-quarter. Good call. By the end of the year, you had gained 18% on that call (see chart on the following page). Of course, it's impossible to know precisely what is going to happen in the markets, but when all signs are pointing to an overvalued condition in one corner or niche segment of the investment universe, inverse funds can be a strong ally. Market Downturn Strategies e contents of this report reflect the personal views, opinions, and research of Penn Wealth Publishing. While measures are taken to help assure the accuracy of data, no guar- antees can be made and the firm is not liable for any losses incurred by subscrib- ers. is is not a solicitation to buy. Always consult your investment professional before investing any money. Using Inverse Funds to Create Gains and Protect Positions On their face, inverse funds make perfect sense in a bear market, but investors need to be aware of risks.

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