Since moving long back into the TSP funds in February, I've not advanced much -- about 1%. I'm 100% exposed here, with nothing in the G-Fund (cash).
Risk is higher than it's been since November. Here's a chart that I posted yesterday in my other blog:
As with all my images, right-click on it to open in a new window or tab.
The chart shows a ratio of anticipated risk. In the numerator we have an ETF, the VXZ, which is a longer-term measurement of anticipated risk in the markets, determined by longer-termed "greeks" on option prices. In the denominator we have an ETF, the VXX, which represents the volatility index .VIX, which is the anticipated volatility in the next 30 days.
When the VXX is dropping in value, the market feels there is less risk, and typically, they are right. When the VXX falls faster than the VXZ, the shorter-termed view is bullish and the graph moves upward from lower left to upper right. When the market starts pricing in more volatility the VXX grows faster than VXZ, causing the chart to fall.
This is the situation that we are in now.
The chart above is a weekly chart, simply to filter the day-to-day noise out. As you can see, I've placed a moving average along with the ratio, and that moving average *just* started to point downward. This isn't good for our portfolio. When this points up, and does so conclusively, we know that we will continue to be in a bull. We still are, but the bull is getting tired.
The graph at the top of the chart is the slope of the moving average in the chart. It shows when this ratio of VXZ:VXX is off to the races, and it also shows when it slows. Your eye can see that it pays to watch this, as we don't know what the right side of the chart will look like next week, next month, or next year. When it falls below 0 that is a clear warning of heavier seas, and visibility to calmer seas disappears.
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It's the end of the month, and by my records, we have a reallocation chip left on the table. It has to be executed today by 12:00 EDT, or if we do it tomorrow, it will count as one of our moves in March.
If you play the 4-Fund/4-ETF game (F-Fund / AGG, I-Fund / EFA, C-Fund / SPY, S-Fund / VXF), then here are your allocations going into March:
- F-Fund / AGG: 9%
- I-Fund / EFA: 22%
- S-Fund / VXF: 41%
- C-Fund / SPY: 28%
This does not account for cash, e.g., there is no provision to put 25% or 50% or 75% in cash. The allocations above are fully invested. Decrease each percentage as you see appropriate.
If you play the 3-Fund/3-ETF game (no F-Fund / AGG), then here are your allocations:
- I-Fund / EFA: 19%
- S-Fund / VXF: 52%
- C-Fund / SPY: 29%
I fall into this latter camp, as there simply is no compelling reason for me to play the F-Fund/AGG over the long haul, as bonds typically underperform in a low interest rate environment.
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Trading Plan for Today
I intend to reallocate my funds according to the 3-Fund/3-ETF levels shown above. I do not plan to move any allocation to cash, as my wife has a longer time frame than many of you and can withstand drawdown more than those of you who are retired or are thinking of retirement. Your situation may be different, and given the VXZ:VXX ratio above, you may want to consider taking a portion of your monthly gains off the table.
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Remember, you are responsible for your own investment decisions, and I am not. Please take ownership for your actions and please do your diligence.
Regards,
pgd
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