Mitigating Tail Risk

Comments on “Leveraged ETFs: Don’t Get Wiped Out by the Tail,” by Matthew Crouse, CFA, MBA, Ph.D., in the August 2020 AAII Journal:

I manage multiple accounts with different levels of risk. I have been doing this for over six years. I will invest 2% to 10% of the account’s value in ProShares UltraPro QQQ (TQQQ).

These accounts can afford to lose the investment in the fund. The potential reward is so high that the risks are minimized if you ignore the ups and downs and don’t need to take any money out.

You do need a defined approach that you stick with. If you don’t like your results, define a new approach.
—Bruce M. from California

Great analysis, especially the volatility impact along with projected return calculation.
—Suresh R. from New Jersey

Question: Do you know any investor who has been invested in ProShares UltraPro QQQ constantly for 10 years?
—H.M. from Texas

Why not guard against losses with a series of laddered stop-loss or stop-limit orders?
—Barry B. from New Hampshire

Matthew Crouse responds:

H.M., I don’t personally know an investor who has been invested in ProShares UltraPro QQQ for 10 years. However, with the fund having amassed billions in assets, there are plenty of longer-term holders in addition to the usual short-term speculators. More importantly, many prospective investors look at historical 10-year returns as a guide to what future returns could be. I do this myself. However, in the case of ProShares UltraPro QQQ, I believe this would be a mistake for the reasons outlined in the article.

Barry B., Those would be valid ways to mitigate tail risk. You would want levels wide enough to avoid frequent triggering (particularly as daily moves are magnified with leverage) while narrow enough to prevent large losses.

Meaningful Proxy Moves

Comment on “Are Virtual-Only Annual Meetings Virtuous?,” by John Deysher, CFA, in the August 2020 AAII Journal:

Annual meetings are pretty much a PR circus for big companies. Individual stockholders are a small minority except in some small companies, real estate investment trusts (REITs) and a few others. So responsible voting is left to the big institutional owners. Many of them don’t vote or have a policy of only supporting management.

The only time I have seen proxy voting move a big company is when about one-third of shares are moved against management. This happened at ExxonMobil Corp. (XOM) some years ago when some environmentalists and the Rockefeller family forced a more environmentally friendly policy. The company changed after one-third voted in favor of the changes.

—Mark W. from Texas

ETF Guide Suggestions

Comment on “The Individual Investor’s Guide to Exchange-Traded Funds 2020,” by Charles Rotblut, CFA, in the August 2020 AAII Journal:

This article is welcome, but I miss the preformatted tables provided in prior years. The online ETF viewer is limited to 100 rows of data, making it less than useful for tabular data analysis. Fortunately, the tables can be downloaded into a spreadsheet.

I would like to see AAII provide trailing returns for one, three, six and 12 months to assist in performing momentum analysis. Year-to-date returns do not interest me as the time period becomes variable according to the time of year.
—J.M. from New Jersey

Aging Wealth

Comment on “How Investing Ability Changes With Age,” from Dispatches in the July 2020 AAII Journal:

The July Dispatches section has me wondering whether I could be the exception that proves the rule.

Having retired in 1996 at age 70 and set up my own self-managed portfolio with proceeds from the sale of parts of my small publishing business, my current net worth is 5.32% higher than it was 24 years ago despite the lack of any earned income in all those years. At a disadvantage because of my age? I don’t think so.
—Marvin Brown from Ohio

Long-Term Care Assessment

Comment on “The Benefits and Costs of Long-Term Care Insurance,” by Terry Savage, in the June 2020 AAII Journal:

As a person heavily involved in advising and selling long-term care policies, I found your article to be well done and very informative. One area that always seems to be underrated is home health care.

What I have found through experience is that it can end up being more expensive than a private room in a nursing home. However, the level of care is much better at home.

One should be careful when assessing what round-the-clock care at home will cost before deciding on what amount of coverage to purchase.
—Christopher F. Vaughan from Texas