Why do volatility stocks/ETFs (TVIX, VXX, UVXY) trend down in the long-term?
"In an attempt to express this complicated fact in lay terms I shall focus exclusively on the most influential factor effecting the seemingly bizarre outcome you have noted, where the price chart of VIX ETFs indicates upwards of a 99% decrease since inception. Other factors include transaction costs and management fees.  Some VIX ETFs also provide leveraged returns, describing themselves as ""two times VIX"" or ""three times VIX"", etc. Regarding the claim that volatility averages out over time, this is supported by your own chart of the spot VIX index. EDIT It should be noted that (almost) nobody holds VIX ETFs for anything more than a day or two.  This will miminise the effects described above.  Typical daily volumes of VIX ETFs are in excess of 100% of shares outstanding.  In very volatile markets, daily volumes will often exceed 400% of shares outstanding indicating an overwhelming amount of day trading." There is more than a single reason why TVIX loses value over time. Futures curve. VIX is always expected to trend up when under 20(although this could change in the future). This means 1 month away futures contracts are bought at a premium closer to 20. If the .VIX stayed flat at 15, by the end of the month, that contract is only worth about 15. meaning you lost 25%. This affects all VIX ETFs and makes inverse VIX ETFs attractive to hold(if you don't mind your account blowing up periodically). Leverage decay. if VIX goes down 25% two consecutive days, your x2 ETF(TVIX, UVXY) goes down 75%. Even if it doubled back to yesterday's value next day, you'd still be 25% down. ETF funding costs. The fund managers take some money from the pot every day. "Since these indices only try to follow VIX and don't have the underlying constituents (as the constituents don't really exist in most meaningful senses) they will always deviate from the exact numbers but should follow the general pattern. You're right, however, in stating that the graphs that you have presented are substantially different and look like the indices other than VIX are always decreasing. The problem with this analysis is that the basis of your graphs is different; they all start at different dates... We can fix this by putting them all on the same graph:  this shows that the funds did broadly follow VIX over the period (5 years) and this also encompasses a time when some of the funds started. The funds do decline faster than VIX from the beginning of 2012 onward and I had a theory for why so I grabbed a graph for that period. My theory was that, since volatility had fallen massively after the throes of the financial crisis there was less money to be made from betting on (investing in?) volatility and so the assets invested in the funds had fallen making them smaller in comparison to their 2011-2012 basis.  Here we see that the funds are again closely following VIX until the beginning of 2016 where they again diverged lower as volatility fell, probably again as a result of withdrawals of capital as VIX returns fell. A tighter graph may show this again as the gap seems to be narrowing as people look to bet on volatility due to recent events. So... if the funds are basically following VIX, why has VIX been falling consistently over this time? Increased certainty in the markets and a return to growth (or at least lower negative growth) in most economies, particularly western economies where the majority of market investment occurs, and a reduction in the risk of European countries defaulting, particularly Portugal, Ireland, Greece, and Spain; the ""PIGS"" countries has resulted in lower volatility and a return to normal(ish) market conditions. In summary the funds are basically following VIX but their values are based on their underlying capital. This underlying capital has been falling as returns on volatility have been falling resulting in their diverging from VIX whilst broadly following it on the new basis."
I'm in a remarkably similar situation as yourself.  I keep roughly 80% of my portfolio in low-cost ETFs (16% bond, 16% commodities, 48% stock), with about 20% in 6-8 individual stocks.  Individual stocks are often overlooked by investors.  The benefits of individual stock ownership are that you can avoid paying any holding or management fee (unlike ETFs and mutual funds). As long as you assess the fundamentals (P/B, P/E, PEG etc.) of the company you are buying, and don't over-trade, you can do quite well. I recommend semi-annual re-balancing among asset classes, and an individual stock check up.  I've found over the years that my individual stocks outperform the S&P500 the vast majority of the time, although it often accompanied by an increase in volatility.  Since you're limiting your stake to only 20%, the volatility is not really an issue. "There is no rule-of-thumb that fits every person and every situation.  However, the reasons why this advice is generally applicable to most people are simple. Why it is good to be more aggressive when you are young The stock market has historically gone up, on average, over the long term.  However, on its way up, it has ups and downs.  If you won't need your investment returns for many years to come, you can afford to put a large portion of your investment into the volatile stock market, because you have plenty of time for the market to recover from temporary downturns. Why it is good to be more conservative when you are older Over a short-term period, there is no certainty that the stock market will go up.  When you are in retirement, most people withdraw/sell their investments for income.  (And once you reach a certain age, you are required to withdraw some of your retirement savings.)  If the market is in a temporary downturn, you would be forced to ""sell low,"" losing a significant portion of your investment.   Exceptions Of course, there are exceptions to these guidelines.  If you are a young person who can't help but watch your investments closely and gets depressed when seeing the value go down during a market downturn, perhaps you should move some of your investment out of stocks.  It will cost you money in the long term, but may help you sleep at night. If you are retired, but have more saved than you could possibly need, you can afford to risk more in the stock market.  On average, you'll come out ahead, and if a downturn happens when you need to sell, it won't affect your overall situation much." Common financial advice is just that - it is common and general in nature and not specific for your financial needs, your goals and your risk tolerance. Regarding the possibility of a US market not going anywhere over a long period of time, well it is not a possibility, it has happened. See chart below:  It took 13 years for the S&P 500 to break through 1550, a level first reached in March 2000, tested in October 2007 (just before the GFC) and finally broken through in March 2013. If you had bought in early 2000 you would still be behind when you take inflation into account. If you took the strategy of dollar cost averaging and bought the same dollar value (say $10,000) of the index every six months (beginning of each January and each July) starting from the start of 2000 and bought your last portion in January 2013, you would have a return of about 35% over 13.5 years (or an average of 2.6% per year). Now lets look at the same chart below, but this time add some trend lines.  If we instead bought whenever the price crossed above the downtrend-line and sold whenever the price crossed below the uptrend-line (with the first purchase at the start of January 2000), we would have a return of 93% over the 13.5 years (or an average of 6.9% per year). Another more aggressive option (but manageable if you incorporate a risk management strategy) is to buy long when the price crosses the downtrend-line and sell your existing long position and sell short when the price drops below the uptrend-line. That is profiting both up-trending and down-trending markets. Again we start our buying at the start of January 2000. By shorting the index when the market is in a down-trend you could increase the above returns of 93% by another 54%, for a total return of 147% over 13.5 years (or an average of 10.9% per year). To conclude, using a simple long term strategy to time the markets may result in considerably higher returns than dollar cost averaging over the medium to long term, and I know which strategy would help me sleep better at night. "The VIX is a mathematical aggregate of the implied volatilities of the S&P 500 Index components. It itself cannot be traded as there currently is no way to only hold a position on an implied volatility alone.  Implied volatility can only currently be derived from an option relative to its underlying.  Further, the S&P 500 index itself cannot be traded only the attempts to replicate it.  For assets that are not tradable, derivatives can be ""cash settled"" where the value of the underlying is delivered in cash.  Cash settlement can be used for underlyings that in fact due trade but are frequently only elected if the underlying is costly to deliver or there is an incentive to circumvent regulation. Currently, only futures that settle on the value of the VIX at the time of delivery trade; in other words, VIX futures holders must deliver on the value of the VIX in cash upon settlement.  Options in turn trade on those futures and in turn are also cash settled on the value of the underlying future at expiration. The VXX ETF holds one to two month VIX futures that it trades out of before delivery, so while it is impossible to know exactly what is held in the VXX accounts unless if one had information from an insider or the VXX published such details, one can assume that it holds VIX futures contracts no later than two settlements from the preset.  It should be noted that the VXX does not track the VIX over the long run because of the cost to roll the futures and that the futures are more stable than the VIX, so it is a poor substitute for the VIX over time periods longer than one day. ""Underlying"" now implies any abstract from which a financial product derives its value." Someone already mentioned that this is a risk-reversal, but as an aside, in the vol market (delta-hedged options) this is a fundamental skew trade. (buying calls, selling puts or vice versa). Initially vega neutral, the greek that this trade largely isolates is vanna (dvega/dspot or ddelta/dvol). "There is no good proxy for VIX, because it is a completely made-up value. Most listed options trade on an underlying security.  I can therefore choose to buy either the stock, or a future or option on that stock.  In this way, the future and option are derivatives in that they derive their value (in part) based on something else, in this case the stock price as of now. VIX is a different entity altogether.  It is based on the volatility of the market, using ""market expectation of near term volatility conveyed by stock index option prices"".  But the FAQ goes on to state that they are adding factors into the formula. So right away there is no one equity/stock that you can hold that will necessarily match the VIX in any significant way, because it is not directly based on stocks, but indirectly through other options and computations. In effect, therefore, the VIX in indeed only available through its options, and is not observable (tradable) in and of itself." Buy some pits for xiv in October if you want to piggy back. Options pretty cheap right now.  Not sure if xiv has options, but if vix spikes, xiv will tank almost 1 for 1 negative relationship. Chart both of them over time to see the relationship. If you want to trade to gain from short-term volatility, you can use Derivative-based ETFs that try to track the inverse of a broad index like the S&P 500. Note that these ETFs only track the index over a 1 day period, so you shouldn't hold these. If you're looking for a longer-term investment strategy, look at low-beta stocks, which often do well or produce dividend income during volatile times. Examples include McDonald's Corp and utilities like Consolidated Edison.