Parking Money Amid Volatility

NYCBB's picture
Rank: King Kong | 1,366

All the experts preach not timing the market, I get it. There's some smart people on here and was hoping to get some discussion on options of parking your money to reduce the risk and still get some returns. I'm not confident in the stock market currently and given the bond yield curve maybe it's best to just roll short term. Thoughts on other options some of you are considering?

Comments (28)

Dec 17, 2018

Hi PEConsultant, whoops, looks like nobody chimed in here.... maybe one of these discussions below is relevant:

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If those topics were completely useless, don't blame me, blame my programmers...

Dec 19, 2018

if you're looking at a place to park cash in order to invest at what you perceive to the be the bottom, money market yields have picked up recently, see if your broker offers something compelling, taxable yields are 2.25-2.5% in the institutional funds I've seen, with tax free yields being around 65% of that or so.

if you live in CA or NY, consider a state specific tax free option

Dec 20, 2018

Since there is no free lunch, and you want to park your money, the options would include cash or something similar to cash. You could invest in a money market fund or the securities invested in a money market fund. Yields are still low but at 2% or so, at least you are getting something. Another option would be some kind of market neutral fund. I am not a big fan of the them but they do have less volatility than long funds.

Dec 20, 2018

Trying to time the markets or make bets without risking capital is easy.

Example:
Assume a timeframe of 6 months, a risk tolerance of 0 (no risk to principal), and that an investor is ok with a 6 month lockup with $100k of capital.

Trade:
1- buy 6 month US t-bills yielding 2.54% (annualized, so 1.2% or so for 6 mo) that will yield 100k total return (approx 98.8k)
2- with the remaining cash, buy futures or an options trade on the S&P that expires in 6 months
3- if the S&P rises, you'll make money--if it falls, you haven't lost a penny

You can tweak this by your risk tolerance (e.g. willing to risk 2% or 5%) to safely make bets in a prudent manner.

What indicators can you use to "time" the market? Well, a timetable of upcoming events (including major economic data releases like PMI), and evaluate the potential impact to market. Then, consider what you think the market is worth (price multiple, gordon growth model, etc.) and solve for the price that meets your required return (e.g. "all trades should aim to make 15%"). There are no strategies that will help you find the "perfect bid", so instead, make smart bets instead.

Made some edits to clarify the language.

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Dec 20, 2018
Rahma:

Timing the markets is easy as long as you know how to manage it effectively.

I disagree.. If it were that easy, most mutual fund managers would out perform their benchmarks. Data shows that PMs clearly have a difficult time achieving positive alpha.

Dec 20, 2018

Did you even read my post? facepalm

Dec 20, 2018

I did read your post. What you are saying is that if you allocate funds in a certain way, or use a certain strategy, or look at certain data, then timing the market is easy. Active managers, whether it be mutual funds, hedge funds, etc, for the most part, have a difficult time outperforming the market. Money managers often have great credentials and have access to endless data, models and strategies. Yet, they still struggle to generate positive alpha.

I am not saying that it is impossible to time the market but I would never say that it is easy.

Dec 20, 2018

I see your point and generally agree with it. Attempting to time the market is not a smart thing to do unless you do it in a way where your likelihood of losing money goes down to (close) zero.

In the method I posted above, I explained a way to time the market without losing money. I should have been more clear in that when I write "timing the market is easy" I really mean "**trying **to time the market is easy." I figured the subsequent sentence would have made it clear that most people who try to time the market don't just get it wrong but also lose money. Sorry for the confusion.

    • 2
Dec 20, 2018

Yeah this isn't timing the market because (depending on option pricing and yields of course but generally speaking) this handicaps your upside as well. You're just reducing vol.

OP: do you have a specific use for that cash in the next few years? Park it in Money Market funds (or anything similarly structured. Just avoid duration exposure). If not - throw it in equities and don't look at it for 10 years.

Dec 20, 2018

Would you mind elaborating on the no risk aspect of buying futures contracts on the S&P 500?

Dec 20, 2018

Not sure if you understand the trade.

There are two legs:
Leg 1: 98.8k in 6-mo US T bills that will pay 1.24% (means the future value of this trade is 100k)
Leg 2: with 1.2k, buy index futures or make an options trade

This method will allow you to make bets without the risk of losing principal. The cost of this trade is the opportunity cost of just holding a t-bill sans trade (e.g. guaranteed 1.24% vs. volatility 1.6-2%). In any case, the post wasn't meant as financial advice. It was instructions on strategy that can be used to reduce risk and still get some returns.

    • 1
Dec 21, 2018

Thank you for clarifying. Yes, you can only lose the 1.2K on the futures that you will make on the Treasury Bills. Therefore, you would not lose money. However, how much can you make over the six month period if you are only investing 1.2K in the stock market? I realize that you can change the numbers to reflect different risk levels. Unless I am missing something, this example will only give you a return that is a little higher than a Treasury Bill.

Dec 21, 2018
Rahma:

Not sure if you understand the trade.

There are two legs:
Leg 1: 98.8k in 6-mo US T bills that will pay 1.2% (means the future value of this trade is 100k)
Leg 2: with 1.2k, buy index futures or make an options trade

This method will allow you to make bets without the risk of losing principal. The cost of this trade is the opportunity cost of just holding a t-bill sans trade (e.g. guaranteed 1.24% vs. volatility 1.6-2%). In any case, the post wasn't meant as financial advice. It was instructions on strategy that can be used to reduce risk and still get some returns.

Are you recommending buying $1.2k of notional exposure on futures or $100k?

    • 1
Dec 21, 2018

$1.2k is the risk budget. As I'm sure you're aware, the risk budget just describes the max loss you can sustain before incurring a loss of principal...

Dec 21, 2018
Rahma:

$1.2k is the risk budget. As I'm sure you're aware, the risk budget just describes the max loss you can sustain before incurring a loss of principal...

So, you are suggesting using $1.2k of notional exposure in futures? Why wouldn't you just buy $1.2k of SPY? The guy is asking the time and you're describing a balance wheel.

The OP asked where to park a small amount of cash. I'm a little unsure how trading futures helps him. You showed him the most rudimentary equity linked note concept (bonds + option). I'm still not sure how futures helps at all here.

    • 1
Dec 21, 2018
DickFuld:

So, you are suggesting using $1.2k of notional exposure in futures? Why wouldn't you just buy $1.2k of SPY?

I didn't list out all potential pairs... Sorry?

The guy is asking the time and you're describing a balance wheel...The OP asked where to park a small amount of cash...You showed him the most rudimentary equity linked note concept (bonds + option).

Yeah that was the point. I used an extreme case to lay out the essentials of an equity linked note that he could do himself. If this was Reddit maybe I would have just suggested, like most others, to buy CDs or money market funds. But this is WSO where, I assume, people are not necessarily interested in the most obvious (or easiest) answer.

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Most Helpful
Dec 21, 2018
Rahma:
DickFuld:

So, you are suggesting using $1.2k of notional exposure in futures? Why wouldn't you just buy $1.2k of SPY?

I didn't list out all potential pairs... Sorry?

The guy is asking the time and you're describing a balance wheel...The OP asked where to park a small amount of cash...You showed him the most rudimentary equity linked note concept (bonds + option).

Yeah that was the point. I used an extreme case to lay out the essentials of an equity linked note that he could do himself. If this was Reddit maybe I would have just suggested, like most others, to buy CDs or money market funds. But this is WSO where, I assume, people are not necessarily interested in the most obvious (or easiest) answer.

i assumed you were suggesting for him to buy $100k of notional exposure, which clearly would be a terrible idea for what he suggested he wanted, as he would have had the same downside as putting the whole thing in the market.

I would probably just do something simple like have money in a high yield savings account and throw a little bit in the market, given his stated objective. It doesn't really sound that different than what you're suggesting.

The problem is that I have read too much BS on WSO and I like to call out bullshit. I assumed that you were telling him to dump everything in S&P futures. My apologies for calling out something that likely wasn't there.

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Dec 25, 2018

Interesting. So with this strategy assuming you buy options. Would you cash in your gains if say month 1 had a big increase and the value of the option shoots in due to the option value and look for a re entry or would you hold and determine near expiration?

Dec 21, 2018

I feel like it's time to start nibbling on an S&P 500 ETF... we're already down 17% or so from the all time high. In 2008 we dropped like what, 54%? And that was a hell of a recession... I don't think the next one will be half as severe.

I'm going to start throwing ~10% or so of my cash into the ETF every week here if we keep going down.

Long term mindset here, I don't mind if I'm in the red for a year or two, it'll pay off eventually. Buffett style

    • 1
Dec 21, 2018

You are brave. That is almost 40% less than the previous two corrections.

Dec 21, 2018
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