erryl:

DI-

"When the Omen appeared in May I modeled my portfolio and then went down to a level of volatility I was comfortable with by selling into rallies and buying hedges. By the time the decline began my portfolio stood at .2X the volatility of the S&P with a portfolio yield double that of the S&P. Prior to the adjustment it was about .6X the S&P. That .2 is well within my comfort range for a Bear market and is about as defensive as I need to get. The performance of my portfolio since May accurately tracks the predicted performance of the model. I am content."

If you have previously explained it or it is so basic that I should know, sorry... but could you tell us how you measure the volatlity of your portfolio and what you do to reduce it?

erryl

 

I use Riskgrades to do the modeling. RG It is a free site but you must register. RG gives you an estimate of how volatile your portfolio is versus an index. I use the .SPX. Right now I am about .2X. I have found the 20 day RG forecast of my portfolio generally accurate as a tool.

Riskgrades is a tool that measures short-term volatility of your investments, your portfolio and the market over 20 days. It is therefore sensitive as the market itself changes volatility. Volatility itself is quite  -- uh -- "volatile". Therefore you need to monitor Riskgrades periodically even if you don't make portfolio changes.

Also RiskGrades has an excellent "What If" feature that allows you to see how your portfolio would perform during various market crashes including 1987, the Tech Wreck and September 11. (It is best to be sitting down during this exercise perhaps with a libation of a choice.) :-) My experience is RG is the best tool I have found for defensive modeling. I tend to mostly use it when I see downside risk increasing such as when the Omen appeared. I consider it like a speedometer. Given road conditions how fast do I want to be going?

RG has some weaknesses and takes some flexibility on the users part but the biggest weaknesses are not relevant until you go to the next level of modeling. In short like M* x-ray it has some quirks but its benefits considerably outweigh them.

As for reducing risk --- Inverse hedges have the most dramatic impact on risk reduction. What you will find at RG is at some theoretical point there is often a diminshing impact from adding more hedge. That is because the biggest risk impact comes when you sell long positions to buy an inverse position.

RG will give you a guide on which of your positions contribute the most risk to your portfolio and therefore a possible map for reducing risk. Risk is a factor of position size and investment volatility. It will also tell you which inverse funds give you the most bang for your bucks given your current portfolio but you have to do it by trial and error testing. Some things may surprise you at first. For instance if I were to double my GRZZX position my volatility would only go from .2X to .18X thus saying a second tranche isn't dollar effective.

Using cash to buy inverse funds does not get you the same bang for the buck as selling a long position because cash itself diminishes overall portfolio volatility and drawing down cash adds to the volatility of the remainder of the portfolio. Of course if you went net short (which most people won't except perhaps in a trading portfolio) volatility would begin to actually increase portfolio volatility the more hedge you use.

I hope this helps. Have fun.