A “margin call.” A “margin trap.” A “margin call” on a portfolio of low-volatility assets is a call to use leverage, sell less than what one has purchased, and call the price up or down. (Remember that it’s “the price” which is driving the market.) The difference between a call for low-volatility and a call to sell is that high-volatility assets tend to rise and low-volatility assets tend to fall, and the market tends to take notice at both ends. As a result, a potential margin call may well signal that a portfolio has gone into a bear market and should not be held, even if a new investment may offer some growth potential – and may even attract some new investments.
A “margin trap” consists of two factors.
In a “margin call,” one needs both to be holding the index funds and not moving them away from their target, but the “sell call” is very difficult to make if one is still trading the underlying low-volatility securities.
Another margin traps occur where investors may be trading low-volume assets in a portfolio of high-volume assets. In a “margin trap” in this scenario, investors need to sell more than the difference between their total portfolio holdings and the portfolio of long-term assets. The selling margin is very difficult to achieve in this way, but high-volume investors should always be wary of “margin traps”.
Are there multiple indicators you can use to show my portfolio’s underlying risk of decline over time?
Yes, you and your advisor should be constantly monitoring these indicators for signs of deterioration in your portfolio. One tool that can often indicate underlying stability or market strength is a “change in performance” measure, a broad measure that includes several of the indicators on this page. You can also look for signs that your fund or index has started to lag the market. In this case, it’s often helpful to track the fund over time in a way that allows you to see whether the fund is gaining or losing its market-share advantage, as a trailing 12-month moving average will provide helpful clues here if you suspect that market strength may be shifting in such a way that it could offset earnings gains. You can also look in detail at recent year-over-year percent changes to identify whether stocks and bonds are trading in the right direction or whether the trend is heading in a particular direction.
Should high-volatility asset allocation be an asset allocation
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