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Buy an index fund and when the market is down try and buy more. If you do wish to do something to actively manage things, try giving Nassim Taleb books a read,

Buy an index fund and when the market is down try and buy more. If you do wish to do something to actively manage things, try giving Nassim Taleb books a read, or just read about his or Mark Spitznagel's investment strategy. They also keep 97% of their money in an index fund, but the other 3% are slowly wasted away buying far out-of-the-money PUT options on boring stocks that are very cheap to buy because they'll "never happen". And most of the time, they lose that money. But when COVID hits, or airplanes crash into famous buildings, or <insert next surprise here>, those little never-gonna-happen options pay for all the damage to the 97%. Their core theory is that humanity systematically underestimates the probability of very rare events. So it's not about timing the market, it's about using this exploit in human psychology to reduce or eliminate your "risk of ruin" from very rare events.

wkyle 4y ago
To give a brief counter to the Taleb/Spitznagel Empirica Kurtosis strategy, the pricing of deep out of the money options is systematically overvalued in relation to the Black-Scholes model, suggesting that the market correctly prices in fat tails. The volatility smile pattern describes the 'overvalued' nature of these options, and the SKEW index tracks their pricing. https://en.wikipedia.org/wiki/Volatility_smile https://en.wikipedia.org/wiki/Volatility_smile https://www.cboe.com/us/indices/dashboard/skew/ https://www.cboe.com/us/indices/dashboard/skew/
- largbae 4y ago
  I wonder if this adjustment is enough... Spitznagel's fund did return 4,144% in Q1 2020. Maybe they found some other similar hole, but one seems to still exist. https://finance.yahoo.com/news/mark-spitznagel-univesa-cio-on-risk-mitigation-204157461.html https://finance.yahoo.com/news/mark-spitznagel-univesa-cio-o...
  - wkyle 4y ago
    It's certainly possible that even with the volatility smile markets still underprice unlikely events, but high returns from a tail-heding fund during a black swan event hardly provides any evidence. Regardless of pricing, the expectation of the strategy is infrequent high returns and frequent poor or negative returns. Whether the market accurately prices these events also depends on how bad returns are during years without anomalous market conditions, and the intervals between fat-tail events.

wkyle 4y ago

To give a brief counter to the Taleb/Spitznagel Empirica Kurtosis strategy, the pricing of deep out of the money options is systematically overvalued in relation to the Black-Scholes model, suggesting that the market correctly prices in fat tails. The volatility smile pattern describes the 'overvalued' nature of these options, and the SKEW index tracks their pricing. https://en.wikipedia.org/wiki/Volatility_smile https://en.wikipedia.org/wiki/Volatility_smile https://www.cboe.com/us/indices/dashboard/skew/ https://www.cboe.com/us/indices/dashboard/skew/

largbae 4y ago
I wonder if this adjustment is enough... Spitznagel's fund did return 4,144% in Q1 2020. Maybe they found some other similar hole, but one seems to still exist. https://finance.yahoo.com/news/mark-spitznagel-univesa-cio-on-risk-mitigation-204157461.html https://finance.yahoo.com/news/mark-spitznagel-univesa-cio-o...
- wkyle 4y ago
  It's certainly possible that even with the volatility smile markets still underprice unlikely events, but high returns from a tail-heding fund during a black swan event hardly provides any evidence. Regardless of pricing, the expectation of the strategy is infrequent high returns and frequent poor or negative returns. Whether the market accurately prices these events also depends on how bad returns are during years without anomalous market conditions, and the intervals between fat-tail events.