Editor’s note: On Monday, long-time Casey Research analyst Andrey Dashkov shared some of the best ways to weather market volatility. And yesterday, he told the story of leaving a collapsing Belarus – and the important lessons it taught him about wealth-building.

Today, we hear more from Andrey about the importance of keeping a balanced portfolio that won’t expose you to unnecessary risk… so that if an unexpected crisis hits, you’ll be prepared.


By Andrey Dashkov, analyst, Casey Research

Yesterday, I told you why I decided to escape a collapsing economy… how I learned to be a contrarian… and why having a well-curated portfolio that will hold up in a crisis is crucial.

And after today’s market plunge, that’s more relevant than ever. At writing, the S&P 500 is down 5%, with similar declines from the Dow Jones and the Nasdaq. And all this volatility is pushing us closer and closer to a bear market.

Some sectors are getting hit harder than others. The energy sector, for example, is taking a brutal beating. For example, with today’s loss, XLE (the ETF tracking the S&P 500 Energy sector) is down 41% year-to-date.

But that brings me to today’s topic: You don’t need a market-wide collapse to destroy your wealth. You just need to be in the wrong place at the wrong time… following the crowd… and blindly investing in what you don’t understand.

The Crisis Almost Everyone Missed

Between 2011 and 2018, the market calmed down. Post-2008 volatility gave way to a sense that the worst was over. And that the future would be rather tranquil – with low volatility.

And since volatility can be traded, investors started betting that it would go down further.

If you expect something to lose value, you “short” it. So, the “short volatility” trade was born. It was done through futures and other derivatives. There were also “inverse” volatility exchange-traded funds (ETFs) and exchange-traded notes (ETNs). Their prices went up when volatility went down.

Though they were the simplest way to trade lower volatility, nobody understood exactly how they worked. And the risks they had built into their structures were a mystery.

But the investment thesis of the day was dead simple: the worst of the 2008–2009 crisis was over. Things would get better from there.

And they did. While the S&P 500 slowly grew by about 150% between 2012 and 2018, the VolatilityShares Daily Inverse VIX Short Term ETN (XIV), which is an inverse volatility ETN that rises as volatility falls, shot up by over 2,000% at the peak. It was a 21-bagger… and then it went belly-up.

It crashed in February 2018.

Strong earnings growth in the U.S. hinted that inflation would go higher. The market thought the Fed would likely raise rates in response.

Stock prices dropped. Volatility went up, and XIV was liquidated as its value crashed to almost zero.

In a feat of irony, XIV’s prospectus predicted it from the very start. On page 197, it said: “The long term expected value of your ETNs is zero.” For once, Wall Street didn’t lie.

The Lesson: It Doesn’t Take Much to Blow Up Your Portfolio

In the grand scheme of things, that 2018 market dip was minor. You can’t find it in the chart of the S&P 500 below if I don’t point it out. Here it is, the small and deadly crisis:

This goes to show you don’t need a market-wide collapse to destroy your wealth. You just need to be in the wrong place at the wrong time… relying on the “wisdom” of the crowd chasing investments it doesn’t know a thing about.

As the events unfolded, I watched headlines in disbelief. But even though this happened over two years ago, you should still heed this lesson in your investing today.

The market will offer you products that will get you excited. And without the proper guidance, it’ll steamroll your holdings and drive your portfolio to zero, if not lower.

Without expert guidance with your interests in mind, you could lose most, if not all, of your net worth. And you can never be sure where problems may arise.

But you can avoid most of them if you don’t play with money you can’t afford to lose.

What does that mean for you, today?

For starters, don’t chase biotech stocks that on first glance have something to do with vaccines or COVID-19. Biotech stocks are infamous for their “binary” performance. They either deliver stellar gains or they go to zero.

Right now, treat obscure biotech stocks like travel. Do it if you’re absolutely certain that the destination isn’t going to kill you. And avoid inessential trading.

Good investing,

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Andrey Dashkov
Analyst, Casey Research