May 2019

china tide wave crash

  • Investors pulled $14.6 billion out of emerging markets in May — the largest monthly EM outflow in six years, according to the Institute of International Finance.
  • The trade war between the US and China “impacted equity flows heavily,” the IIF said.
  • Visit Markets Insider’s homepage for more stories.

The trade war between the US and China that’s injected volatility into domestic stocks for more than a year has more recently caused investors to yank capital out of overseas markets.

Investors pulled $14.6 billion out of emerging markets in May, making for the largest monthly emerging-market outflow since June 2013, the Institute of International Finance said Friday in a report.

Renewed trade tensions between the US and China “sparked a sharp decline in nonresident capital flows to EM,” IIF economists Jonathan Fortun and Greg Basile wrote. 

The findings underscored not only ongoing trade tensions between the US and its trading partners, but the widespread volatility felt across global financial markets in recent months.

Net non-resident portfolio flows into emerging-markets, according to the IIF.

The IIF’s report came on the heels of President Donald Trump’s announcement on Thursday that he planned to impose tariffs of up to 25% on goods coming into the United States from Mexico until the “illegal immigration problem is remedied.”

Trump’s surprise announcement sent stocks reeling and the Mexican peso plunging

The IIF economists noted the stark difference in equity and debt flows into emerging market during the month of May. While $14.6 billion poured out of the former, $9 billion flowed into the latter asset class.

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The outflows from global stock markets were widespread during May, and not confined to one particular country, the IIF said.

“The reading for EM ex-China equity flows was -$7.4 bn, while China equity flows were -$7.2 bn, showing generalized outflows for equities across the whole EM complex,” the economists said.

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Read More The US-China trade war just sparked a $14.6 billion exodus from emerging markets

Using more than 32 years of analysis, University of Illinois at Chicago Professor Oleg Bondarenko explored if certain strategies could exploit the richness in pricing of index options. He shared his findings in the recent white paper, “Historical Performance of Put-Writing Strategies” and discussed his research at the 35th annual Cboe Risk Management Conference.  See what he has to say below.


Volatility Risk Premium (VRP) for S&P 500 Options

In his research, Bondarenko found that the S&P 500 Index implied volatility has considerably exceeded its realized volatility. From 1990 to 2018, the average implied volatility, as measured by the Cboe Volatility Index® (VIX®), was 19.3%, while the average realized volatility of the S&P 500® Index was 15.1%. The Volatility Risk Premium (VRP) was a significant difference of 4.2 percentage points.

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In light of the existence of the VRP, option-selling strategies may have had the potential to deliver superior risk-adjusted returns when compared to traditional asset classes and option-buying strategies.

Higher Risk-Adjusted Returns for PUT Index since Mid-1986

Professor Bondarenko’s paper analyzed the performance over more than 32 years (from June 30, 1986 to Dec. 31, 2018) of six benchmark indexes: the S&P 500, Russell 2000, MSCI World, Treasury bond and two benchmark indexes that engage in monthly transactions in SPX options.  

  • Cboe S&P 500 PutWrite Index (PUT) tracks the performance of a hypothetical strategy that purchases Treasury bills, and sells cash-secured at-the-money (ATM) put options on the S&P 500 index once a month.
  • Cboe S&P 500 5% Put Protection Index (PPUT) tracks the performance of a hypothetical strategy that holds a long position indexed to the S&P 500 Index, and buys a monthly 5% out-of-the-money (OTM) S&P 500 put option as a hedge.

Research showed the PUT Index had higher risk-adjusted returns (as measured by the Sharpe Ratio, Sortino Ratio and Stutzer Index) than the five other indexes studied.

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Sharpe, Sortino and Stutzer Explained

  • Sharpe Ratio | Measures the risk-premium per unit of volatility, or the mean excess return divided by the standard deviation.
  • Sortino Ratio | Measures the mean excess return divided by downside deviation. Unlike the Sharpe Ratio, the Sortino Ratio does not penalize for large positive returns
  • Stutzer Index | Measures the mean excess return divided by the standard deviation. The Stutzer Index penalizes negative skewness and high kurtosis.

Some investors wonder if the Sharpe Ratio can be used for an index with negative skewness and a non-normal distribution because the Sharpe Ratio assumes a normal distribution. The Sharpe Ratio is often applied to the S&P 500 Index, a well-known index that has had negative skewness. In Bondarenko’s research, he found the skewness was negative for all options-based and stock indexes studied, including the PUT Index (-2.09) and the S&P 500 Index (-0.81). In light of the negative skewness, it’s worth noting the Stutzer Index was slightly lower than the Sharpe Ratio for both the PUT Index and the S&P 500 Index. However, based on the Sharpe and Sortino Ratios and the Stutzer Index, the PUT had higher risk-adjusted returns than the five other indexes studied. As Bondarenko notes in his paper, “Due to high volatility risk premium, PUT has delivered attractive risk-adjusted performance.”

Much Higher Returns for Put-Selling vs. Put-Buying Index

Between 1986 and 2018, the PUT Index rose 1835% while the PPUT Index rose only 708%. As shown below, the VRP facilitated much higher returns for put-selling over the put-buying index.

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Key Takeaways

  • Higher Risk-Adjusted Returns for PUT Index

    The PUT Index had higher risk-adjusted returns (as measured by the Sharpe Ratio, Sortino Ratio and Stutzer Index) than all five of the other indexes studied – S&P 500, Russell 2000, MSCI World, Treasury Bond and the PPUT put-buying index.

  • Much Higher Returns for PUT Put-Selling Index vs. PPUT Put-Buying Index

    The PUT Index rose 1835% while the PPUT Index rose only 708%.

  • Volatility Risk Premium Facilitated Stronger Risk-Adjusted Returns for PUT

    From 1990 to 2018, the average S&P 500 Index implied volatility was 19.3%, while the average realized volatility of the S&P 500 Index was 15.1%. Due to high volatility risk premium, PUT has delivered attractive risk-adjusted performance.

  • Higher Alpha, Lower Volatility and Lower Beta for PUT Index                          The PUT Index had a monthly alpha of 0.2%, annualized volatility of 9.95% (vs. 14.93% for the S&P 500) and a beta of 0.56.

Learn More

Read more insights on Bondarenko’s white paper, here.To read the full white paper, “Historical Performance of Put-Writing Strategies (2019),” visit www.cboe.com/Oleg

Read More White Paper Shows Volatility Risk Premium Facilitated Higher Risk-Adjusted Returns for PUT Index

Ramit Sethi 2

  • Ramit Sethi is the author of the New York Times bestseller, “I Will Teach You To Be Rich.”
  • If you’re worried about a recession, there are only two things you need to do, according to Sethi: secure an emergency fund and ensure your investments are diversified across, and within, stocks and bonds.
  • Sethi recommends target date funds, which automatically choose a blend of diverse investments based on your age — the younger you are, the more aggressive the investments.
  • The “biggest danger” to a young person isn’t a risky portfolio or potential market drop, he said, but avoiding investing all together.
  • Visit Business Insider’s homepage for more stories.

It’s near impossible to recession-proof your money, says financial expert Ramit Sethi.

“The market will go up, the market will go to down. Nobody knows. Nobody can tell you. It doesn’t matter if they’re on some TV show or anything. It’s all bullsh–,” Sethi, who recently released the second edition of his bestselling book “I Will Teach You To Be Rich,” told Business Insider.

“A better question is, ‘Can I have a diversified portfolio?’ … And do you have enough cash just in an emergency fund in case there was something bad that happened to you on a day-to-day living basis?” Sethi said.

Regardless of the state of the markets, diversifying your investments across, and within, stocks and bonds and securing an emergency fund are two of the most important steps to take with your money, he said.

“That’s the best thing you can do,” he said. “What you shouldn’t do is try to predict what’s going to happen because you will almost always lose.”

Sethi recommends keeping cash reserves equal to at least three months and, ideally, up to a year’s worth of expenses to fall back on whenever it’s needed. The best place to keep that emergency fund, rainy day fund, “oh f—” fund, or whatever you call it, is usually in a high-interest bearing account, like a high-yield savings or money-market account, where it remains within arm’s reach but continues to grow while you’re not using it.

As for investing, two things are crucial to ensure your money remains as safe as possible during market chaos: diversification and asset allocation.

“Investing in only one category is dangerous over the long term. This is where the all-important concept of asset allocation comes into play,” Sethi wrote in his book. “Remember it like this: Diversification is D for going deep into a category (for example, buying different types of stocks: large-cap, small-cap, international, and so on), and asset allocation is A for going across all categories (for example, stocks and bonds).”

Asset allocation could make a difference of hundreds of thousands of dollars over your lifetime, he continued. 

“In other words, by diversifying your investments across different asset classes (like stocks and bonds, or better yet, stock funds and bond funds), you can control the risk in your portfolio — and therefore, control how much money, on average, you’ll lose due to volatility,” Sethi wrote.

The easiest way for the average investor (read: someone who wants solid returns with minimal work) to achieve proper asset allocation is through a target date fund, according to Sethi. These “funds of funds” automatically choose a blend of investments based on your age — the younger you are, the riskier the investments (more stocks). As you approach retirement age, they become more conservative (less stocks).

Target date funds are generally low-cost and tax efficient, too, Sethi said, but you’ll typically need at least $100 to $1,000 to get started. At the end of the day, the “biggest danger” to a young person isn’t a risky portfolio or potential market drop, he said, but avoiding investing all together.

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Read More 2 steps to take to protect your money from a recession, according to a financial expert and bestselling author

Renee Kwok

  • Renee Kwok is a certified financial planner and the CEO of TFC Financial in Boston, a $1 billion financial planning and asset management firm.
  • Kwok says the most important investing advice she shares with her teenage daughter is to keep savings in a high-interest account, invest extra savings in stocks, and contribute to investments regularly.
  • Visit Business Insider’s homepage for more stories.

Moms are chock full of advice, but when Renee Kwok talks to her daughter about money, her words may very well carry twice the weight.

Kwok is a certified financial planner and the CEO of TFC Financial, a $1 billion financial planning and asset management firm based in Boston.

She tells her daughter to “work hard and save most of your money. The three-bucket philosophy endures today: spend a little, donate some — and save most.” But, Kwok says, it’s what you do with your savings that matters most.

1. Put your savings in a high-interest account

“You can’t collect interest or grow your stacks of cash if they are sitting in an envelope in your desk drawer,” Kwok tells her daughter.

A high-yield savings account or money-market account is often the best place to keep savings so it grows, but remains easily accessible. While you won’t wreck your financial life by not storing savings in a high-interest account, your money will almost certainly lose value thanks to inflation.

Online savings accounts, as opposed to big bank branches, usually offer the best rates, which can be up to 200 times more than a checking account.

“Even in today’s low interest rate environment,” Kwok told Business Insider, “getting some interest on your cash in a bank account is better than getting no interest — and you’ll never have to worry about your parents accidentally throwing out your ‘home’ bank account if they decide they need to clean your room.”

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2. Invest your extra savings in index funds

When you have enough savings to cover your short-term needs, turn to the stock market, Kwok advises her daughter and other young investors.

“For young people who have their lifetimes, 40 or 50 or 60 years to stay invested in the stock market and ride out the bumps along the way, history shows us that’s the smartest move financially,” she said.

“Low-cost index mutual funds and ETFs (exchange-traded funds) from companies like Vanguard, BlackRock (iShares), Schwab, and Fidelity are an excellent option for young people investing their first few thousand dollars in the market,” Kwok said.


Index funds
are a type of passive investment that exposes investors to a broad selection of stocks in order to diversify and ultimately minimize risk. They’re typically low-cost and even outperform actively managed funds.

3. Contribute to your investments early and regularly

Compound interest shows us that the more money we contribute to our savings and investments, and the earlier we do it, the more they’ll grow.

“A dollar you put in a Roth IRA in your teen years in the long run may be worth just as much as $8 or $10 you invest in your 50s or 60s — because that dollar benefits from decades more compounded growth and reinvestment,” Kwok said.

And most importantly, Kwok tells her daughter, don’t monitor your investments on your phone every day.

Investing experts often give advice along these lines because investments fluctuate from day to day. Watching every dip and valley creates an almost irresistible temptation to interfere and try to compensate for any losses or hustle for more gains — which is a mistake. When you’re investing for the long term, you want to leave your money alone and let it grow over time without interference. Over a matter of decades, those daily dips will usually even themselves out.

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Read More A CEO who manages a $1 billion firm teaches her teen daughter 3 core lessons about investing

rich person

Millionaires are often cut from the same cloth — they’re disciplined, have focus, are resilient, and practice perseverance.

These are all qualities that help them build wealth, according to Sarah Stanley Fallaw, co-author of “The Next Millionaire Next Door: Enduring Strategies for Building Wealth” and the director of research for the Affluent Market Institute. But these traits aren’t necessarily innate — there are two ways anyone can develop them.

The first way, according to Stanley Fallaw, is to understand where you are today.

“If you know that you’re prone to make emotional decisions, it’s first being aware of that and kind of taking stock of that and asking yourself, okay, when is it that I’m making decisions that are really not in my best interest?” she said in an Afford Anything podcast with writer Paula Pant

Once you’ve built awareness, you should then build new behaviors around typical behaviors, Stanley Fallaw said. She referenced Charles Duhigg’s book, “The Power of Habit,” for an understanding of building new behaviors around things you don’t often give thought to.

Read more: A researcher who studied more than 600 millionaires found the same 2 qualities helped them get rich

“The example he gives is the chocolate chip cookies that he’s always eating at a certain time of day and all of a sudden he’s gained all this weight,” she said. “It’s replacing some of those behaviors and you can do that with finances as well.”

She added: “I think that it’s first acknowledging that maybe you have a shortcoming related to some of those things. Which is hard for some of us to do. And then, replacing some of those behaviors with others that are more conducive to achieving your goals long term.”

The benefits of measuring progress towards a goal

When building new habits, there’s one thing you should watch out for: measurement.

According to James Clear, author of “Atomic Habits,” measuring your progress towards a goal has three benefits: It can make the behavior more obvious, create an additive effect, and add immediate gratification.

However, if you obsess about the measurement too much, it loses its benefits as it becomes the target — a concept known as Goodhart’s Law, Clear said. By becoming so focused on the measurement, he explained, you can pull yourself off course; overemphasizing quantifiable victories can cause you to miss the emotional signals of progress.

So if you over-focus on a target number to get rich, it may sidetrack you from the qualities — like resilience and perseverance — that can help get you there.

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Read More A woman who studied 600 millionaires says the same traits helped them get rich — and there are 2 key ways anyone can develop them