Terrible idea. You will be paying fees to be long and fees to be short. That's two sets of fees to be market neutral. Go to cash if you have an urge to time the correction.

 

Would it be a good idea for a mostly cash account?

 

You said you have a couch potato portfolio. It doesn't matter how it's spread across the accounts. It's one pot of money.

 

I have a couch potato portfolio in my RRSP account, but my husband has 100K+ cash in his - and doesn't want to buy anything at the moment because 1) the prices are too high and 2) believes there'll be a 10-20% correction.

We are both 45, so have 20+ years to invest before we'll need the money for retirement. I like risking, he doesn't

 

I have a couch potato portfolio in my RRSP account, but my husband has 100K+ cash in his - and doesn't want to buy anything at the moment because 1) the prices are too high and 2) believes there'll be a 10-20% correction.

No matter how you slice and dice the accounts, it's a common pot of money that belongs to the family (just ask the divorce lawyers). It doesn't make sense to be long in your account and short in his account. The combined position is market neutral.

We are both 45, so have 20+ years to invest before we'll need the money for retirement. I like risking, he doesn't

If he doesn't like "risking", inverse ETFs are definitely out.

 

seems like a risky and expensive (1.15% MER on HIU) choice to compliment a couch potato portfolio whose entire raison d'etre is to avoid this type of market timing, no?

if you think (since no one knows) there is an imminent and significant correction coming, wouldn't the more prudent bet be to stash that cash in a HISA until the drop, then add to your index funds at the lower prices? At least your 'bet' is then restricted to withholding the cash from being currently deployed in the CP portfolio.

Forgoing the interest earned in the HISA, while also paying the inverse ETF's fee, is a fair swing in *guaranteed* return on that cash...all for what amounts to a gamble. IMHO, not a great idea in the first place, but particularly not a good compliment to a CP portfolio, IMHO.

 

I'll try to explain the reasoning (although I understand that it's flawed). I just learned about the Couch Potato strategy less than a month ago, and purchased TD Index Funds to give it a try. I don't want to sell them now (because they already fell below book value - plus I'll be paying an early redemption fee - and I do want to keep them long term).

I have some extra cash that I can deposit into my RRSP now (was planning to use it to open a TFSA, but that can wait) And thought that buying Inverse ETFs for the short term (and then selling them and buying more Index Funds after the correction is over) would help me keep zero balance for now.

Yep, trying to time the market - a typical rookie mistake - but hard to resist the urge...

 

No, this is a bad idea. These are day trading vehicles only. They are not meant to be used to take medium or long term positions against the index direction.

Any article or advisor suggesting someone uses these to do anything other than day trading is being negligent, in my opinion. These vehicles are well known to have problems... it's complex

Don't hold them any longer than a few days.

 

Excellent post James.

 

Motley Fool does have some good articles.

Generally you will see a for and against. So one day you may see the article to consider an inverse ETF as a hedge. The next day you may get a compelling article as to why it is best avoided.

Like everything you can use the sites as a foundation for further research. Read the prospectus. Understand how it works and what you are paying for.

 

Generally you will see a for and against. So one day you may see the article to consider an inverse ETF as a hedge. The next day you may get a compelling article as to why it is best avoided.

Like everything you can use the sites as a foundation for further research.

Well, they mostly recommend (or advice against) individual stocks, which I'm not ready to buy just yet But I did notice the descrepancies: in their "1 Top Stock" (Enbridge) article it says:

"The dividend yield stands at 2.9%--which might not seem terribly high--but look at the history of dividend increases, and you can see the trajectory."

But in another article Envridge is #3 out of "three less risky stocks" - with less dividend:

"And while they wait, investors in Enbridge are also treated to a 2.75% dividend that keeps creeping up annually."

google says it's 2.74... and I can't help it but start noticing "Welcome Fool | Log in" in the top right corner

 

MT IMHO with regards to finance, you're going to find that if you ask 1000 different financial people what to invest in, you're going to basically get 1000 different opinions--LOL.

MT I would highly recommend you read this book. It's really helped me.

http://www.goodreads.com/book/show/13104016-count-on-yourself

 

MT I would highly recommend you read this book. It's really helped me.

http://www.goodreads.com/book/show/13104016-count-on-yourself

Read a sample. Too many personal details, as for my taste - and if I wanted to read someone else's life story, it'd have to be more interesting than that

"For me it was three strikes and you're out with advisers. At that point I resolved to count on myself."

For me it was one strike... lol

 

The big downside of paper trading is that it removes the emotion. This is probably the investors biggest enemy.

 

I 100% agree with you LF.

 

Thank you all! Sorry, got swamped with work, finally came home and read through the latest comments...

With regards to Inverse ETFs - I already agreed that it was a bad idea (and thank you for explaining why!)

As for paper trading... Depends on personality I guess. I almost doubled our downpayment money back in the 90's (turned 30K into 55K in less than a year and a half). My financial advisor back then advised me not to do it, my husband was having anxiety attacks when the stock went down right before the payment was due (but the house got delayed - and the prices went up again right before the new date) I knew almost nothing back then - and had no fear - and reeeeaaalllyyyy wanted the upgrades (oh the bleached hardwood floors! ) And wasn't even a bit surprised when everything worked out - because I had no doubts it would.

But when I tried to repeat the same results first on paper, then with real money few years later - I got mediocre results. Wrote it off to "the beginners luck" and just lost interest - until now, when I'm trying to do it "the right way" (as I don't have that fearless drive anymore... Kinda miss it, but "whatever works" - reading, learning and analyzing is also interesting

 

I almost doubled our downpayment money back in the 90's (turned 30K into 55K in less than a year and a half). My financial advisor back then advised me not to do it, my husband was having anxiety attacks when the stock went down right before the payment was due (but the house got delayed - and the prices went up again right before the new date) I knew almost nothing back then - and had no fear - and reeeeaaalllyyyy wanted the upgrades (oh the bleached hardwood floors! ) And wasn't even a bit surprised when everything worked out - because I had no doubts it would.

I think your financial advisor gave you sensible advice but I don't know the whole story around it

It's great that you almost doubled your money but I think the activity you described is gambling. Most speculation activity is, after all, gambling. This is not inherently a bad thing.

I do think you got lucky. Nothing wrong with that either. But I think it's important to realize that these are inherently risky activities and you can't guarantee yourself a good outcome, even if you're careful and use the best techniques, etc.

Personally I think it's important to recognize that a lot of what we do in markets comes down to gambling. If you gambled in the past and made money, it doesn't mean this will always be the outcome. You could do everything right and still lose money, or even get wiped out. It's important to realize you're gambling because this affects how much money you're willing to expose to loss

I only do market speculation with spare money that I can stand to lose. I would never advise using vital/critical money for things like short-term trading or even purchasing individual stocks.

 

I don't think you're an idiot for buying XTR, I just wanted everyone to know that XTR is heavily exposed to some risky assets (namely junk bonds) because this isn't obvious from the way XTR is marketed.

It turns out that junk bonds have done great these last few years. So XTR has done great. If we get a bear market one day and if equities and/or junk bonds do badly, and the two have a high correlation by the way, then XTR could drop a lot.

 

XTR is preying on retail investors' irrational preference for yield. Someone should create an index fund that pays out a 10% yield (mostly RoC of course)... I'm sure it would be very popular.

 

Someone should create an index fund that pays out a 10% yield

Someone did.
Someone is in prison for 150 years.

 

He didn't go to jail for the yield, it was for fabricating the NAV.

 

I guess every good idea has already been taken.