A weekly thread to discuss financial matters - from personal all the way up to global.
Ground Rules
- Remember that we're all just Internet randos. Don't bet your life savings on a hot tip from this thread.
- Keep culture war in the culture war thread. Yes, global events may impact our personal finances, but that does not mean we have to incessantly harp on culture war aspects here. If you are going to discuss it, please stick to the practical impacts of it on an individual level.
- Be kind. Remember that everyone here comes from different circumstances. We all have different resources available and different risk tolerances.
- Don't let the perfect be the enemy of the good. Better is better. Celebrate people when they take a step up and work to move their finances in the right direction. Don't flame out because they haven't followed what you consider the optimal path. Everybody has to start somewhere.
Jump in the discussion.
No email address required.
Notes -
Ok money gurus, what's an investment to make based on the prediction that over the next 5 years, market volatility will be significantly greater than expected?
You could call it an AI hedge, I suppose.
If AI is going to increase volatility, it's probably also going to increase returns right?
Best best is to stay the course with 100% equity allocation. Unless you're running leverage, you'll be fine and get the highest expected return.
You could also add bonds to your portfolio. This would, depending on your assumptions, give you less mean return but higher median return.
Why not ask ChatGPT or Claude to write you a simulation? Ask it to create a simulation with 2 funds: bonds and stocks. Plug in default volatility and return expectations. Find the highest median return. Then adjust volatility and run again.
Don't you need it to simulate with the full covariance matrix and not just the diagonal terms to have this be a meaningful simulation? I think you can also just do it analytically for a two-asset basket if you know the covariance matrix and expected returns. Probably better if the covariance matrix is itself a function of the return stream. The covariance matrix its self, of course, being one of the least stable quantities and most difficult to estimate and simulate.
Edit: I realize I didn't actually answer the original question.
Nasdaq futures probably have enough options liquidity to produce a relatively long-term variance-spread-replicating options position. This is technically a direct trade on what you are asking about, but is also one of the easiest ways to blow yourself up if you do not know what you're doing. It would be interesting to see how the implied forward variance compares to historical.
Yes, my mistake and hopefully Claude would have caught that. Other calculators I've seen have included a correlation.
One reason that bonds did so well in the 2010s is that they were generally anti-correlated with stocks, making a levered stock-bond portfolio outperform the stock market with less volatility.
Since Covid there have been times when stocks and bonds have shown positive correlation, making bonds less useful as a hedge.
Tough to predict which regime we'll enter in the future.
Yes, that's more or less what I was thinking of in my initial reply.
I assume so, if you used a sensible prompt.
Also, sorry, I made an unrelated edit after you replied. To expand on the variance swap replication, it looks like even the one-year term strip is crazy illiquid. Like, literally zero open interest on most nodes. Eyeballing the quoted mid IVs, though, @omw_68 could be right that the market is (at untradable mids) underpricing forward AI vol.
More options
Context Copy link
More options
Context Copy link
More options
Context Copy link
More options
Context Copy link
More options
Context Copy link