Buy & Hold, Hold On For Dear Life (HODL)

Why Not Make Trading Easier on Your Mental Well-Being?

Every day lately, I wake up to Varney on Fox Business (I met Stuart once at a currency trading conference) and see the stock market carnage. I see all the guests agonizing over where the bottom of the recent run down will be. They are all trying to predict what will happen, just like they were trying to predict why stocks were going to still be going to new highs 6 months ago.

For those “conservative” traders/investors that use the long only, buy and hold approach to the stock market, good luck with looking at your next month’s statement. We are clearly in a bear market. Rallies seem to run out of steam quickly and it’s off to new lows once again. Economic indicators are looking terrible and there’s a very high probability that we will be in a recession soon.

And those buy and hold 60% bonds and 40% stock buy and hold investors? Here’s a look at the last several years of bonds. When interest rates go up, bonds go down as they have for quite a while now. With inflation pressures on the FED, I don’t expect to see this trend reverse for some time. The 60/40 crowd is in for some tough news ahead.

So, why not attack risk instead of ignoring it or passively doing nothing about like the buy and hold investor does? A lot of you are used to seeing me talk about active hedging. I attack the market risk in my long etf portfolio by selling futures contracts on the ES futures. For more on that you can get a description of how I hedge my own long etf positions on the hedging page at: https://enjoytherideworld.odoo.com/hedging. That is just one way to attack risk.

You could look at the chart of the NQ market above and see it first break the first of the red lines back in January. You could have simple sold your stock positions at that point and sat in cash and be roughly 30% ahead of the game right now even while earning zero interest. With a brief rally in March, it’s been nothing but downside. But that’s not the only way you can attack risk. I’ve dealt with risks lately with a multiple strategy approach to the problem. Here’s some of the ways I’ve attacked (exploited) risk.

First, if you see risk in any position against you, you can reduce the position or time out of the positions. The three indicators I used in the chart above if you can’t read the fine print on your phone would be Keltner, Donchian and Bollinger. They are all noise band indicators with mathematical abilities to include volatility of prices in some/different fashion. It’s simple to place a stop order in many instruments at a point where the position is now in a down trend. You’re out with no fuss or worry.

Next, I’ve created a stock index futures strategy that operates using a trend following model, in this case 9 days, where I can go long or short. It gives me a little extra kick to the performance to the upside in bull markets and exploits the risk during downside markets. That would be a very profitable position in a deep bear market to offset other potential losses.

I started looking at cryptos about a year ago and decided that, for me, using the futures on cryptos made more sense than trying to deal with the crypto exchanges. I’m very familiar with futures and already have a futures account. Starting small and using the micro futures I started trading Bitcoin and Ether futures. Easy to do and doesn’t take a lot of time.

As you can see from the chart of micro Bitcoin futures, that market has had a similar and even worse fall from a high up in the $70,000 to recent prices below $30,000. By establishing a trading strategy in something like this you can be short this market and making profits to offset losses you might be suffering over in your long stock portfolio, since cryptos and stocks seem to be correlated lately. I would prefer cryptos to be NON-correlated, but you take what you can get.

Finally, there’s lots of index option candidates you can use to buy an in the money put option to mitigate at least some of the risk of the downside in stocks. As stocks decrease, puts increase in value. I won’t cover all the ins and outs of options trading here in “Thoughts”. That would take a book and then some. Something simple like when you get a down direction signal, throw on some puts to match your long position size. Easy to do and you would have drastically attacked your risk.

Let’s now look at the mental side of trading. If you are sitting there watching your equity curve fall hoping that something will happen to turn around the decline, you are powerless. Some outside force (the markets) are affecting the value of your investments, which may also be affecting the ability for your to have financial security in the future. I’m retired and have no desire to go back into the money management industry on a day-to-day basis. This is one of the reasons that I smile a lot! Feeling powerless is not a mental state I ever want to be in with respect to the markets.

By doing something to attack risk, you have now moved your mental processes into an active mode, rather than trying to be passive and letting the markets do what they will as you watch the horror movie. Attack mode takes away a lot of fear, because you have strategies in place to either positively remove/reduce the risk or exploit the risk for profit. You are engaged. You are confident that you have a plan to deal with various risks and are executing that plan flawlessly.

I recently came out of a teeth cleaning session at my dentist’s office. The dentist came running up to me and said, “Tom, I’m not happy with my retirement portfolio.” I asked, “Well what are you doing with it?” She replied, “ I have a advisor at (a major brokerage house which will go unnamed) and I have (fill in the name) manage the portfolio. I put in my annual contribution to the plan last Friday and today (Wednesday) the plan is back to were it was before I put the contribution in!”

She and her planner have no plan. He suggested a number of stocks and bonds and they just sit there in the portfolio. If the market goes down, she is told, “Stocks have always eventually come back to make new highs.” She is distraught. She is lost. She will stand the pain until she cannot and closes it all down. We haven’t gotten to that point of pain yet, but we sure are headed in that direction. Buy and hold may be a plan, but if the trader/investor cannot handle what is likely to be extremely anxious times along the path to the future, what’s the point? They’ll just close it down and the plan disappears.

Where’s the market’s bottom going to be? I have no clue. I am just a simple trader with a plan to attack risk and exploit it when I can, and when the indicators show me an up direction down the road, the shorts come off and the longs come into the portfolio and I enjoy the ride in another direction.