With the VIX hitting multi-year lows recently, I think it is time to take a look at purchasing some insurance against market uncertainty and downside risk. The SPY is hovering around it's highs and very well could keep charging up higher. However, at this point in time I believe the downside risk of unaccounted for macroeconomic problems and potential negative surprises in equities could create a downward spiral that could shave 10-20% off of current valuations.
I am not a doom and gloomer, and I think that for the most part SPY is close to fairly valued, but perception is reality and the disaster of 2008 is still not erased from investors' minds. I do not believe it would take a black swan event to create a scenario where investors scramble to take profits, and/or buy the VIX for protection.
So my solution to investors who are mostly invested long at this point would be to scale into a position in VXX and/or VXZ (depending on your personal preferences) and start buying some insurance against surprise risk while the premiums are at lows. It was not so long ago when the VIX took off into the stratosphere as everyone scrambled for protection against the market crash. I feel this accomplishes two important things for your portfolio:
1) Hedges your long positions and helps you to protect your gains from the past year's powerful bull market.
2) Allows you the time to liquidate your positions you feel are most at risk to a market correction and lets you sleep at night knowing you will not be caught with your pants down by an unforeseen risk.
Disclosure: No positions. The VXX and VXZ are not long-term investment vehicles, they are short-term (3-6 month max) hedges against negative market surprises and increased perception of risks. The importance of scaling in to achieve a good overall price cannot be underestimated; it is crucial to establishing a good priced entry.
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