I’ll come right out and say it. I have gravely mishandled my trading in 2022, in spite of some awesome charting, and the solution to that fumbling is as simple as can be. It all comes down to this chart:
This chart is of the volatility index, or the VIX. As you can see, during the year 2022 (which still has about 10% of itself left to run), the VIX has reached the lower 30s on seven separate occasions (or five, if you want to group together instances where it only briefly dipped below), and it reached the lower 20s on four different occasions.
It goes without saying that, with a bearish portfolio, had I gone to 100% cash any time the VIX hit 31, and re-entered whole-hog when the VIX got to 21, I would have vastly, vastly, VASTLY better results than I do right now.
Let me say that again: VASTLY.
I feel some rhetorical questions coming on!
Have the short-sale ideas I’ve offered this year been good quality? Absolutely!
Have traders who have used my ideas, but only when the VIX was low, profited? Oh, my lord, Yes!
Has watching my profits get completely torched time and time again been frustrating? Take a guess!
So why have I “hung on” so much? Simple: I don’t want to miss “the big fall.” But you want to know something? – – – and this is the insight that I want to offer – – missing ONE complete collapse (which may not ever happen) is completely worth it if I am able to RETAIN a series of smaller profits along the way.
In other words, let’s just say that, for the entirety of 2022 (and beyond), I went totally to cash every stinking time the VIX went to 31 and I refused to re-enter until it got to 21. So that’s a ton of profits right there. Let’s go on to say that the market gets absolutely devastated and the VIX goes to, I dunno, 70, and I totally and completely miss ALL those short-sale profits.
Well, obviously, I’d be disgusted with myself and livid. But my intuition tells me that holding on tight based on the PROSPECT of a fall that may not EVER happen simply hasn’t been worth it.
I confess, looking at this chart, there seems a totally legitimate possibility that the VIX may, at some point, absolutely catch fire.
But it hasn’t, and instead I feel like I’ve opened up a paper recycling plant in which dollar bills are put through a shredder, are later formed into nice, fresh, clean dollar bills, only to be put back into the shredder again. It’s preposterous.
So I’m embracing a little mnemonic rhyme for myself with respect to the VIX, which is “VIX at Twenty, Use Your Money, VIX Thirty-Three, Time to Flee.” It’s not going to keep Dr. Seuss up at night (well, he’s dead) but it’s catchy and easy to remember. You don’t like it? Come up with your own rhyme!
It just so happens that the VIX is approaching 20 right now, so before this week is out, I’m aiming to have my cash fully deployed again. All the same, “toughing it out” over and over again while the markets soared and the VIX (repeatedly) collapsed from the lower 30s to nearly 20 has made the year 2022 much more of a waste of time and effort than it ever should have.
So that’s my hard-won lesson. I’d be interested to hear your thoughts on the matter in the comments section, including any slightly more sophisticated approaches (and I do mean slightly, because I honestly can’t stomach complex and convoluted rules). I hope this helps!
