Hedging Your Portfolio in a Rising Market
Sep 22, 2010

Hedging Your Portfolio in a Rising Market

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 averages.

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 time?

Mark D Wolfinger

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