Just minutes after I gloated that my pension had reached half a million pounds two weeks ago, Mum called to say Dad had fallen off his motorbike and was in hospital.
My dignity. His downfall. I've never read the Old Testament, but I'm pretty sure that's not how Proverbs 16:18 is supposed to work. A car ran a red light and his intestines ruptured.
Not what you need at 82 years old. By the time I landed in Sydney, my plane was sold out, and my father was out of the operating room. Something has happened, I told the surgeon. Let's hope so, he replied.
Just one month after my boat exploded and two years since a trash joke caused me to lose my job, this latest drama highlights the ups and downs of life. I'm sure readers have their own tales of rapidly changing fortunes.
Please email me and I'll read them to my new patient – but no memes for fear he'll pop his pins. The rise and fall of markets is a good topic. Humorless, but great.
Especially the volatility of stocks this week. What catches my attention is that fewer investors think such declines are worth worrying about compared to the past few years. Although slightly higher, the cost of three-month protection against a small decline in the S&P 500 versus potential gains, for example, remains about half the average since 2021.
In other words, stockholders don't worry about scratches on their car's steering wheel, misusing their father's accident for metaphors. The extraordinary rise in stocks around the world during the first quarter pushed bullish sentiment indicators to the extreme.
But at the same time, fears are growing that the region will be wiped out. Consider the Chicago Options Exchange's Volatility Index, which measures expectations of future volatility in US stocks. The cost of put options (the right to buy the index in the future at today's price) was the most expensive in five years compared to put options (the right to sell).
In other words, markets are betting on more volatility in the future, not less. Either stocks rise due to interest rate cuts, or higher productivity caused by artificial intelligence. Or collapse, for example, if inflation returns (in America?) or geopolitical conditions worsen.
Any of these scenarios are possible. As usual, no one wants to miss out while others ride with the wind in their hair. But it's also normal to be afraid of hitting the curb and eating through straws.
The problem is easy to solve – in theory. Simply sell everything moments before the crash and then buy again before the recovery. Back in real life, professional investors use derivatives to protect their backside while maintaining exposure to the open road.
But institutions have access to global derivatives exchanges, as well as armies of savvy bankers keen to sell innovative structured products. All for a relatively low fee, given its size.
What about us retail gamblers, right? In fact, there are exchange-traded funds that are designed with the dual concerns mentioned above in mind. These funds are commonly known as “buffered” or “definable outcome” ETFs.
Stock funds contain a basket of options allocated in such a way as to limit your losses (say by 15 percent) over a certain period (say a year). The problem is that any gains are limited (say by 10 percent).
You can choose your own passive protection. Meanwhile, the upside depends on market conditions. Interest rates are important. Because these funds get premium put options that they use to buy protection, when volatility is low, that is generally the maximum and vice versa.
Options prices are sensitive, my dear. The maximum height limits can therefore vary significantly as new funds are launched. At the beginning of 2022, the popular Innovator US Equity Power Buffer ETF had a cap of 9 percent. A year later the number was more than double that.
Of course, two years ago US stock investors were grateful for protection from a maximum loss of 15 per cent – with the S&P 500 finishing a fifth lower. Buyers of the January 2023 fund would have enjoyed 20 per cent, but the market is up 5 per cent more.
Likewise, stored funds underperformed last quarter. Since volatility in stocks is now low, the upside limits on offer these days are not that great. Also note that you only get the advertised and maximum protection if you invest initially.
Such hype doesn't come cheap — the average fee across the 230 funds available in the U.S., for example, is 80 basis points, according to Morningstar data. The other catch is that the returns do not include dividends.
Despite these drawbacks, assets have more than tripled in the past two years, although most of the action has been on the US side. My UK online broker offers me two S&P 500 funds and one FTSE 100 fund.
However, I think I will succeed, and this is my logic. Most developed stock markets are simply not vulnerable enough to warrant protection, and are often too high to sustain a cap. Even the FTSE 100 rises more than 14 per cent in one year in three years on average, if the past 30 years are any guide. It only fell more than a tenth seven times, and more than 5 percent nine times.
Plus I have a quarter of my portfolio in bonds in case stocks falter. The stocks I own are cheap, which should mitigate any correction. If inflation causes a sell-off, my Energy ETF is also here to help.
But I appreciate that there are many investors who are eager for protection. Maybe they need it. For them, cached ETFs are worth a look. I see my father on the other side of the ward, nodding his pained head.
The author is a former portfolio manager. Email: stuart.kirk@ft.com; Twitter: @stuartkirk__
