Most investors get very bullish when markets are
rising. And why shouldn't they? They feel very clever
for being invested - and feel even better when their
careful stock research has them outperforming the market
But what about market reversals? Should the average
investor (or investment club) think about, or prepare
for the possibility of a strong market reversal?
Is that a possibility for the majority? Doesn't it feel
wrong to accept less than the maximum possible profit
when markets are moving steadily higher? This is a
serious question and forces the investor to evaluate
his/her investing philosophy.
Most people have been led to believe that one should
remain invested at all times and that trying to time the
market is foolish. I agree with the second half of that
sentence. Timing the market is for geniuses and fools.
The rest of us do very poorly (on average) when trying
to time market rallies and declines.
What about a compromise? Instead of selling stocks in
preparation for a predicted decline, why not get
protection in case the market does decline? If that
decline doesn't come, you may earn less than those
without insurance (if you bought puts), but you may
perform better than those who did nothing (if you wrote
covered calls). That's how insurance works. You buy
insurance, hoping that your car will not be demolished
and that your home will not be destroyed by fire.
Portfolios can be insured similarly.
This is just a thought. Should investment clubs look
for ways to gain some protection, or just assume that
all will be well by remaining 100% long, 100% of the
Mark D Wolfinger
Expiring Monthly: The Option Traders Journal
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