Volatility vs Risk
- Thread starter ironchef
- Start date
Different economic sectors offer various rate of returns during different times, last three decades progress and technological advancement concentrated in IT and since QQQ provides higher exposure to those stocks returns are higher. But as Businessman rightly mentioned it was reflected in higher drawdowns, so I don't see any controversy with risk's definition as variability of future outcomes, expressed in current volatility.
If you have the funds it would take for SPY, and you are using money you don't need to pay the bills, and don't mind your money being tied up for a potentially long period of time should you end up fully invested, I see nothing wrong with the way @wxytrader approaches this. SPY will always recover, and like he says, even if you do get "trapped," you're still pulling in that dividend while you wait it out.
He got me curious a few months ago, so I've been following SPY and applying my own version of what he does just out of curiosity -- assuming I had a million dollars that I didn't need to help keep the lights on. lol So far, so good. Up almost $22k since April 30th. Now where do I get my hands on a million bucks!? lol
Or like some writing naked options.
But if you have the time, over a long time QQQ always (almost) beats SPY meaning higher volatility doesn't mean higher risk, using Graham's definition of risk.
The question is if absolute return is always higher over a long period, CAPM is wrong?
If you are a boomer, I can't help you but if you are a Gen Z, time is your key.
If you keep at it, one day you wake up and realized you are there.
Sigma, or IV, e.g. how you price options.
in that case, you can increase your timeframe to dampen it. isn't that what volatility cones show
That was my point regarding time and @wxytrader's points regarding index.
Risk per Graham often is not time dependent and given enough time most companies will go out of business but it is unlikely the index will go to zero.
You should be compensated for taking risk. The risk free rate has zero risk as a baseline. If you want to earn more than the risk free rate (e.g. SPY, QQQ) that earning potential should be directly correlated with risk. One way to measure risk over time is standard deviation (volatility). If you look over 20 year history of your favorite indices their annualized gains should be correlated with a comparable standard deviation. Meaning, the volatility is higher in QQQ but it has more earning potential. Volatility is not a perfect measure, and you will certainly see inconsistencies, but the point is that risk should be aligned with reward potential.
Do your question, no, QQQ is not less risky. It is definitely more risky than SPY, but it's earning potential is much more as a result.
Should you have 70% QQQ or 100% SPY could be an interesting question. I'm assuming the standard deviations would equal around the 70% level, but have no idea without checking.
On a different note, 401Ks STILL don't have technology as an option... so ridiculous.
Do your question, no, QQQ is not less risky. It is definitely more risky than SPY, but it's earning potential is much more as a result.
Should you have 70% QQQ or 100% SPY could be an interesting question. I'm assuming the standard deviations would equal around the 70% level, but have no idea without checking.
On a different note, 401Ks STILL don't have technology as an option... so ridiculous.