Prudent Bear Fund (Bearx)

[Dawg52]

Here is an article from a guy who is adding this to his portfolio. Middleton states that some believe we may see the stock market decline by as much as 50% over the next 3 years. Anyone here believe that this is a good idea for added diversification? Seems to me you can get to the point that you have so many bases covered that you have very little chance for any overall gains. 

http://articles.moneycentral.msn.com/Investing/MutualFunds/MakeaBearMarketBearable.aspx

 

[d]

some believe we may see the stock market decline by as much as 50% over the next 3 years

1) it's possible ("may"), so i guess i could be included in that "some"
2) but i don't think it likely ... if i did, i'd not be holding anything long.
it's true that if you cover all the bases, you've got little potential gain.

 

[brewer12345]

Eh, these types of funds are fine if you want to market time, but I would imagine you'd be better off buying puts if you really thought we were going off a cliff.

 

[d]

for what it's worth ... some time ago i looked at the maximum loss from market peaks (using S&P) ... as i recall it was <50% ... since our last peak was considerably above where we are now, the history suggests it's not likely we'd fall 50% from here.

 

[bosco]

Anyone here believe that this is a good idea for added diversification?

no.

It makes no logical or mathematical sense. The whole point of diversification is to put your money into uncorrelated asset classes.

A "bear fund" is typically very strongly negatively correlated to something long (usually an index). If you hold anything resembling that index, you are working perfectly at cross-purposes to yourself.

negative correlation is not the same thing as no correlation.

You'd come out better by selling the same amount of your long holdings that were perfectly negatively correlated to the bear fund and putting the money into cash.

 

[Indexter]

The following ignores dividends.