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    The Significance of Portfolio Hedging

    October 3, 2023

October 3, 2023

The Significance of Portfolio Hedging

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The wit and wisdom only a father can share

Sometimes a father is not around as much as he liked or his progeny want, but they provide many good bits of advice. Like “buy a plunger before you need a plunger,” and “leave a change of clothes at the office,” and one of my favorites that I learned the hard way is “brush your teeth before you put your tie on.” The list goes on, I am sure you have a few you can add to the list.

Yet there is one I took seriously from a youthful age and live by it daily that is to “always defend yourself.” He meant in a physical afront, but it carries into every realm of living from sports, legal matters as well as financial.

Bottom line is that protecting your wealth is not good enough to believe the secular 50-to-100-year growth trends are going to protect you. Nor will the Feds or the Treasury be able to bail out an unexpected turn of event after it painted itself into a financial catch twenty-two of its own.

Platitudes won’t protect your wealth

Don’t buy into thoughtless promotions like, “Investing in financial markets is a fantastic way to grow your wealth, but it can also be a rollercoaster ride.”
Because it will be a volatility ride only if you trade by following your account balance, full stop. Rather than following valid risk management and timing advice.

 

Market volatility is a euphemism defined by the financial press to describe a downtrend in the averages

However, its real meaning and useful tool of trade volatility means change, rapid change up or down and has little to do with direction.

Market volatility can cause significant losses to your portfolio, when the change breaks lower, which is why investors turn to hedging strategies to mitigate such risks.

The key here is to advance the idea of portfolio hedging.  Taking its level of ability up a level to reduce the “cost of carry” through strategy and timing. Obviously, its aims to protect your investments against adverse market movements.

Protect Your Investments with Portfolio Hedging

The basic portfolio hedging involves buying securities or other financial instruments that are negatively correlated with your existing investments. The idea is that if your original investments lose value, the hedging instruments will gain value and offset those losses. For example, if you hold a large position in a specific stock, you could hedge your portfolio by buying put options on that stock. If the stock price drops, the put options will increase in value, offsetting the losses in your original investment.

By hedging your portfolio, you can protect your investments against market volatility breakdowns and reduce the risk of significant losses. What keeps this strategy at a basic level is that full-time hedging does not eliminate all investment risks; it simply reduces them. Additionally, because of this full-time application, hedging strategies can be complex and may involve transactional costs, such as commissions, fees, and margin requirements that reduce its benefits.

Don’t Let Market Volatility Bring You Down – Hedge Your Portfolio!

Market breakdown volatility is a significant risk for investors, but it doesn’t have to be a reason to panic. By hedging your portfolio, you can protect your investments against market downturns and be better prepared for any unexpected events. A well-timed hedging strategy can mitigate some of the risks associated with traditional investing and provide a level of comfort knowing that your portfolio is protected.

It’s like paying an insurance premium.

But today the idea has advanced beyond the simple full-on, full-time execution of long puts or any other types of portfolio insurance. There are times to be hedged and other periods to be 100% short volatility (i.e., long risk.)

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