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What percentage of my portfolio should comprise of Inverse ETFs?

How much of my portfolio should consist of Inverse ETFs in order to hedge against a general downturn in the market?

Asset Allocation, ETFs
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May 2017

Zero.  The inverse ETFs are bad financial products that are geared to lose money over time.  I have dedicated a significant part of my career to studying inverse ETFs.  I suppose they are OK short-term trading vehicles, but over longer periods of time they simply destroy value for investors.

The best hedge against a general downturn in the market is to keep some liquid cash on the sidelines.  One of the best vehicles for doing so is an FDIC insured online savings account.  The best rate out there at the time of this writing (that I'm aware of) is 1.25%, FDIC insured up to $250,000 per depositor. 

Look to deploy most of the cash reserves from your savings account into the market after a 20% downturn in the broader market indexes.  We haven't experienced a 20% or more selloff in the S&P 500 since the summer/fall of 2011, but that certainly doesn't mean it will never happen again.

Imagine that over the course of your investing life, you had only one trading strategy:  Sit in cash in a savings account until the S&P 500 has a 20% peak-to-trough selloff, then buy an index fund and hold on.  The returns of that strategy over the course of the past 50 years would be spectacular.  The hardest part about implementing that strategy is having the patience to wait for the big selloff.  Too often, investors pile in exactly at the wrong time, near the top of the cycle, often due to fear of missing out on the next leg of the rally.

So, to reiterate, the best hedge against a big downturn is to take a portion of your assets and sit in cash and wait for the big market bust, and to try to get in when others are panicking.  Don't touch the inverse ETFs.

June 2017
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