DOG, inverse ETFs, and leverage

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Spaceman Spiff's picture
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Joined: 2006-08-08

I was sitting at my desk this morning, calling Big Cheese an idiot, when one of my clients calls me with a very serious sound in his voice.  This client doesn't call me often.  Mostly because I don't have the bulk of his money.  He said he needed some advice and direction and then went into his spiel about his retirement plan being down 45-50% in 2008, he's not social security qualified (he's a minister), and he needs to make back the money he's lost.  He said he believes the market is going to go down this year and if I knew anything about options or something that could take advantage of the market decline that is inevitably coming in 2010. 
So I briefly explained the basics of options and inverse ETFs (knowing that if I went any further and explained naked shorts that he might hang up on me) and promised him I would do some research on the subject and get back with him.  Of course I told him I can't do options for him and if he wanted to do that he'd have to find someone else in his area.  But I told him I can do some inverse ETFs, but would need to research further. 
 
Do any of you guys use these things?  Jones has a very negative, as in don't even think about it, viewpoint on the issue.  They've even gone as far as banning a good chunk of the most aggressive ones.  I know Proshares has some inverse funds that track, in theory,       -100% of the movement of whatever index you want to pick.  I can see a strategy like this going really, really well, or really, really, really badly.  It's certainly not a buy and hold strategy.  Suggestions?

Wet_Blanket's picture
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Joined: 2008-11-13

Does he want to go all in?
Sounds like desperation.

Ron 14's picture
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Joined: 2008-07-10

No matter what happens in 2010 that guy will be a pain in the ass client for years to come. If he has temptations like that he will blow himself up eventually.

JackBlack's picture
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Joined: 2008-08-26

Spaceman Soiff:
I would be very careful of inverse ETF. From reading you post, I know that you understand that they are trading tool and not long-term investment. Just make sure that your client knows that inverse ETF are a trading tool. Make sure you research how inverse ETF track the indexes; you do not always get the results that you may expect.
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Spaceman Spiff's picture
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Joined: 2006-08-08

WB - no, he doesn't want to go all in.  I would agree there was some amount of despair in his voice. 
 
Ron - he's not done this before.  He's a guy who I would GKN eventually. 
 
Jack - I understand they are a trading tool.  I also understand they don't do what their name implies over the a long run.  In fact, the fact sheet on DOG says that you should monitor them daily and not expect to track exactly with the inverse of the Dow.  If I didn't think he would blow himself up, I'd send him to Scottrade. 

JackBlack's picture
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Joined: 2008-08-26

Spaceman:
I thought that you would know, but better safe then sorry.
Jack
 

Wet_Blanket's picture
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Joined: 2008-11-13

Don't the 1X inverse funds not have the tracking issue that their leveraged counterparties do?

Anonymous's picture
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Just use the 1x ETF's instead of the 2x or 3x.  If Jones is anything like WFA you can't use the leveraged ones in most accounts anyway.  This is a big FINRA issue I would stay away from.  If he thinks the market will go down and he has already lost so much, he shouldn't do something that could blow him up again. 

Anonymous's picture
Anonymous

Sounds like this guy is a great VA candidate to me.  Guaranteed to make up some of his losses on the income base, worst case.If he's wrong about the market tanking, he doesn't lose his arse.If not that, why not show him a fund that uses a protective put strategy (Eaton Vance has one), and/or an ETF or fund that uses a buy/write strategy.  Then he's diversified, and covered no matter what happens.  Market goes up, he makes money on the put strategy, and the buy/write (just not as much as a pure buy & hold).  Market stays stagnant, he probably makes a few bucks (call premiums wash with the costs of the puts (ish), and he collects some divs along the way).  Market tanks, and the puts make $$$ (or stay even), and the buy/write doesn't lose quite as much as buy and hold. 

DeBolt's picture
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Joined: 2009-07-12

Write covered calls all the way down...
Met Life and Riversource (probably others) have nice annuities with step ups that would benefit here especially if you plan to GKN him out later.

wsubob's picture
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Joined: 2008-08-25

I'm only a new Seg 1 Jonsie, so what do I know, but . . .Based on what I know just about all of the leveraged ETFs (inverse or not) are a trader's tool only - as in intraday holds.If you hold them for any length of time you have issues with contango and backwardation and they aren't going perform like you would think.I'm afraid if you tried anything like this at Jones you might end up being the one blowing him up.  Or you might blow up your keyboard answering all your FSPENDS.Just found a decent article.http://seekingalpha.com/article/104703-explaining-inverse-and-leveraged-etfsThe bigger issue I see is that if you agree to start moving this direction you have lost control of the relationship - and he is now calling the shots.  I know how happy you are at Jones, so you must at least agree in part to the Jones philosophy - and you would be abandoning that completely.  It might be better to lose him as a client - or maybe fight to educate him.They aren't investment principles if we all decide to do something completely different every time the market drops.

Moraen's picture
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Joined: 2009-01-22

The problem with educating clients is that you guys have been educating them for years (90% of returns are asset allocation, MPT, the markets are efficient) and look at what happened to most Jones portfolios (Jones is not alone in this, as evidenced by Spiff's client's other money being down just as much.I am not saying that inverse ETFs or leveraged ETFs are the answer, but as BondGuy pointed out some time ago, it doesn't appear buy and holding is working.  Or any of the other flawed science.

SometimesNowhere's picture
Joined: 2008-12-22

Run away.

N.D.'s picture
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Joined: 2009-07-14

Talk him into buying FAZ on margin and shorting FAS, mark it unsolicited and be done with him by Q2...

 
ETFs with a twist are for specific reasons. I would not even discuss them with a Jones client beyond simple curiosity. Most traders use them to follow intraday maybe intraweek movements but not much else.
 
They are usually not very useful for a single FA because it will take time away from your other business i.e. prospecting. If you have a person that just watches and manages your clients' investments then these products can be useful in certain accounts.

WiredUp's picture
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Joined: 2009-11-24

Whoever said you are going to lose control of this guy was right. He'll be calling and sending you his penny stock newsletters asking you to do some research on them and let him know what you think every other day when the email hits his inbox. If he's close to retirement move him even more conservative and if he's right you will be able to buy on some dips. He'll be happy because he felt like he called it and you'll have protected against some losses and been able to buy more. If he's wrong he's still participating but giving up some of the upside potential.

Or put him in a VA with a principal protection rider and bang him for a 7% rip and talk to him in 2 years when he's pissed at all the upside he missed.

Ron 14's picture
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Joined: 2008-07-10

Moraen wrote:The problem with educating clients is that you guys have been educating them for years (90% of returns are asset allocation, MPT, the markets are efficient) and look at what happened to most Jones portfolios (Jones is not alone in this, as evidenced by Spiff's client's other money being down just as much.I am not saying that inverse ETFs or leveraged ETFs are the answer, but as BondGuy pointed out some time ago, it doesn't appear buy and holding is working.  Or any of the other flawed science.
 
If you started at Jones 10 years ago and you have since put every client in American Balanced Fund for the portion of their retirement money that they won't be using for 5+ years and COACHED THEM TO STAY IN you would have done your job as an advisor. I don't care if they bought it in 2000 or 2007. A generic fund like that will provide enough return for most people to reach their retirement goals. You can buy it and hold it. If they are making withdrawals now or soon those funds shouldn't be in equities at all.

Spaceman Spiff's picture
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Joined: 2006-08-08

I'm putting a VA brochure in the mail for him.  That would be my first choice for this guy.  Sure, the inverse ETF or options strategy would make him some money, but it doesn't address his underlying fear of running out of money.  The VA does.   I told him I was going to send him some info on a different strategy in addition to doing some research on what he asked me about.  
This guy is 55.  And he's a minister.  Many of the ministers I know don't ever really retire.  They just start slowing down their ministries as they get older.  Insted of running a 2000 person church, they downsize to a 500 person church.  He's scatterbrained enough that I'm not sure he's thought that far in advance or not.  I'll get him some info, but my goal with this conversation is to start a planning process for him and show him that he probably won't need to take a bunch of risk to get his goals accomplished.   

Ron 14's picture
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Joined: 2008-07-10

We all better say a prayer for that guy. He will blow himself up. He is worried about 2010 when he has 30 more years to live.

Moraen's picture
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Joined: 2009-01-22

Ron 14 wrote:Moraen wrote:The problem with educating clients is that you guys have been educating them for years (90% of returns are asset allocation, MPT, the markets are efficient) and look at what happened to most Jones portfolios (Jones is not alone in this, as evidenced by Spiff's client's other money being down just as much.I am not saying that inverse ETFs or leveraged ETFs are the answer, but as BondGuy pointed out some time ago, it doesn't appear buy and holding is working.  Or any of the other flawed science.
 
If you started at Jones 10 years ago and you have since put every client in American Balanced Fund for the portion of their retirement money that they won't be using for 5+ years and COACHED THEM TO STAY IN you would have done your job as an advisor. I don't care if they bought it in 2000 or 2007. A generic fund like that will provide enough return for most people to reach their retirement goals. You can buy it and hold it. If they are making withdrawals now or soon those funds shouldn't be in equities at all. Agree.  If you can get them to stay in.  It's much easier to get someone to stay a course if they don't see large losses.Education aside, when emotions come into play people make some pretty dumb decisions.

Wet_Blanket's picture
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Joined: 2008-11-13

Just tell him Jesus doesn't care about his returns, why should he?  Can he take an asset summary page with him to heaven?

LSUAlum's picture
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Joined: 2009-10-18

Moraen wrote:The problem with educating clients is that you guys have been educating them for years (90% of returns are asset allocation, MPT, the markets are efficient) and look at what happened to most Jones portfolios (Jones is not alone in this, as evidenced by Spiff's client's other money being down just as much.I am not saying that inverse ETFs or leveraged ETFs are the answer, but as BondGuy pointed out some time ago, it doesn't appear buy and holding is working.  Or any of the other flawed science.

I think the only time buy and hold works (and my opinion why it used to work more than it does now) is when you have dividend paying stocks. If you reinvest those dividends then when the price rebounds you own more shares than you do today. Your account value increases even when the equity is just back to even. That is truly a buy and forget type stock for a young investor.
 
The reason it doesn't work as well today is because 1) the percentage of companies paying dividends today versus the past 50 years is lower and 2) too many times people watch CNBC and see some growth stock that pays no dividend climbing and get jeleous of the 15% increase in Cap App.
 
Buy and Holding stocks with increasing dividends is still a solid strategy to me, just harder to execute than in 1970.

LSUAlum's picture
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Joined: 2009-10-18

Wet_Blanket wrote:Just tell him Jesus doesn't care about his returns, why should he?  Can he take an asset summary page with him to heaven?
Classic, well done.

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