When seeking ways to reduce “bad volatility” and the risk of significant loss, however, I prefer to employ a diversified basket of these assets rather than selecting one or two alone. I call it, “multi-asset stock hedging” and I believe the diversified approach is the only free lunch in stock risk reduction.
Recently, I partnered with FTSE to create the FTSE Custom Multi-Asset Stock Hedge Index (FTSE Custom MASH Index). One cannot reduce the uncomfortable volatility associated with severe stock sell-offs by investing in or trading the index directly – not yet, anyway. An exchange-traded note or exchange-traded fund could be available in 2015. In the meantime, I suggest that readers consider an equally weighted combination of the following funds for a portion of their overall portfolio:
PIMCO 20+ Year Zero Coupon (ZROZ)
iShares 10-20 Year Treasury (TLH)
iShares S&P National Muni (MUB)
iShares TIPS Bond Fund (TIP)
CurrencyShares Japanese Yen Trust (FXY)
CurrencyShares Swiss Franc (FXF)
PowerShares Dollar Bullish (UUP)
SPDR Gold Trust (GLD)
For those who may not have the discipline or desire to come up with an appropriate amount of multi-asset stock hedging, Pacific Park Financial offers separately managed accounts. I encourage interested individuals or groups to contact me about that alternative. Indeed, tracking the FTSE Custom MASH Index accurately requires the pursuit of Japanese Government Bonds and German Bunds on foreign exchanges.
One final thought regarding multi-asset stock hedging as it pertains to volatility and risk management. You do NOT have to be bearish on stocks to do it. Indeed, you may feel stocks are going to rise without a hitch for years to come. And yet, owning a basket of non-correlated assets in equal measure can still add value to your risk-adjusted returns. For instance, the FTSE Custom MASH Index is up 5.0% in 2014.
There were scores of excellent ideas and presentations at this year’s Global Indexing & ETFs Conference. Still, I found myself wondering why so many participants embraced the notion that central banks could permanently insulate them from severe stock losses in the future. Even in our breakout session on volatility, there had been more interest in “shorting volatility” than seeking ways to mitigate it or “go long.” It is for this reason that I have strongly supported a barbell approach throughout 2014, and will continue to recommend ETFs like Vanguard Extended Duration Treasury Bond Fund (EDV) for the left-hand side of the barbell.