At market extremes, there always appear to be “can’t miss” ways to make money betting on the primary trend. Human beings are hard-wired to be trend followers, and to behave as herd animals at market extremes. This aspect of investor psychology is the reason why there is a teachable moment about risk every few years. An excerpt from a 2009 TGS Financial article, Warning: Leveraged ETFs and Long-Term Investing Do Not Mix:
“Many individuals lost big [in 2008] because they misunderstood the potential risks of leveraged and inverse ETFs, which are designed to capture two or three times the market movement of a particular stock or index fund.”
The dangers of trend-following become apparent when a trend reverses, or when risk makes an unexpected return from vacation.
There are a variety of investment products based on the Cboe Volatility Index, or VIX, which was launched in 1993. The VIX is an indicator of expectations about near-future stock market volatility, and it was historically low in 2017. This caused many investors to become complacent about the risks of VIX products, if they understood them at all.
On Monday, February 5, the VelocityShares Daily Inverse VIX Short Term ETN and the ProShares Short VIX Short-Term Futures ETF each lost more than 96% of their values in one trading day. These products actually performed as they were designed to perform. But did the investors who put their money into them know that they could go to zero in one day?
Plenty of market players have been picking up nickels in front of bulldozers, often with little understanding of the risks they’re taking. It’s our duty to inform you of the dangers of this sort of gamble, especially during periods of low market volatility, when investors are most susceptible to making poor decisions due to “the fear of losing out.”
The highest value a financial advisor can bring is through helping you achieve real-life returns via good saving and spending habits and prudent financial planning. The flip side of that is to help you refrain from making emotional decisions (aka risk increasers) in response to the markets or world events.
If you have questions about the risks of any type of investment, we’re here for you.
Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by TGS Financial Advisors), or any non-investment related content, made reference to directly or indirectly in this article will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this article serves as the receipt of, or as a substitute for, personalized investment advice from TGS Financial Advisors. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. TGS Financial Advisors is neither a law firm nor a certified public accounting firm and no portion of this article’s content should be construed as legal or accounting advice. A copy of the TGS Financial Advisors’ current written disclosure statement discussing our advisory services and fees is available upon request.