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Hedges
Old 05-25-2010, 02:00 AM   #1
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Hedges

Does your portfolio include investments that are there to protect against some specific risk? I'm thinking of such items as gold to hedge against inflation, foreign currencies against a decline in the dollar, and the like. If so, how much of your portfolio is made up of hedges? ISTM that they would have to make up a significant proportion of the whole in order to perform their intended function. Suppose you have 5% of the total in gold—maybe it would go way up in value if there's high inflation, but even if it doubled, how much good would the doubling of only 1/20th of the portfolio do you?
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Old 05-25-2010, 06:34 AM   #2
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My "hedges" are diversification - diversification across asset classes and diversification globally.

For an individual investor primarily invested in index and managed funds, I have a hard time seeing any viable / appropriate specific hedging actions around currency, gold, natural resources, inflation, etc.
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Old 05-25-2010, 10:28 AM   #3
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Nothing specific. However I have a large percentage of international investments (~50%). So a huge hedge against the dollar sinking in value relative to a basket of world currencies. That is roughly based on market cap weighting of US vs. the rest of the world, and also on the chance that long term (ie over 50+ years) the US may lose its status as economic superpower.
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Old 05-25-2010, 11:44 AM   #4
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Originally Posted by Delawaredave5 View Post
My "hedges" are diversification - diversification across asset classes and diversification globally.
Which of course is a very rough hedge, as 2008-March 2009 showed.

Ha
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Old 05-25-2010, 12:55 PM   #5
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My AA, while not fully implemented yet, contains 15% in what I consider hedges (REIT, gold, and energy). As far as having 1/20th (or 3/20ths) of my portfolio up when the other 95% is down, as far as I can see it's better than the alternative.
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Old 05-25-2010, 12:59 PM   #6
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Oh, I didn't know REIT's count as hedges. I have 10% in REITs. 5% is US based, 5% international (via the WPS etf). And Energy is somewhere in the 8-10% range of most broad indexes in general. I know Gazprom and PetroBras is typically a top holding in most emerging markets funds, for example.

I know some folks here own commodities funds, and those are usually loosely correlated with the market and can act as inflation hedges.
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Old 05-25-2010, 01:26 PM   #7
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In my younger days I relied on time, in that I was well diversified and had many years before I needed to access any funds.

Now that I'm an ER I guess the only hedge I have is 5 years worth of withdrawals in cash or cash equivalents. If we go on a long market downturn then I'll start burning through that in the hope that the market will turn around before I'm forced to sell shares to live on.
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Old 05-25-2010, 05:02 PM   #8
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Quote:
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Nothing specific. However I have a large percentage of international investments (~50%). So a huge hedge against the dollar sinking in value relative to a basket of world currencies. That is roughly based on market cap weighting of US vs. the rest of the world, and also on the chance that long term (ie over 50+ years) the US may lose its status as economic superpower.
Ditto. My money is pretty much all in stocks and I try to stay close to the market weight split on US/foreign. I've considered buying some GLD but I think I am way too late to that party. I have one year's living expenses in cash right now and when I ESR, I will probably have a few years worth in cash.
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Old 05-25-2010, 06:00 PM   #9
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I have gold and silver to hedge against inflation, real estate to hedge against prolonged market downturns, dividend stocks to hedge against capital losses, bonds to hedge against volatility, preferred shares to hedge against low yield, venture capital to hedge against boredom , cash to hedge against market collapse, and I may add a few more categories before ER.

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Old 05-25-2010, 09:37 PM   #10
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An effective hedge requires leverage. Otherwise, you would indeed have to put a large portion of your assets toward the hedge, thus damping your returns in a good market. Buying some puts or bear put spreads is one way. They can be purchased cheaply and can return 5 to 10 times what you paid for them in the event of a crash. A crash is really what you want to insure against. The usual ups and downs should be tolerable, with intelligent asset allocation.
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Old 05-26-2010, 08:22 AM   #11
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Oh, I didn't know REIT's count as hedges. I have 10% in REITs. 5% is US based, 5% international (via the WPS etf). And Energy is somewhere in the 8-10% range of most broad indexes in general. I know Gazprom and PetroBras is typically a top holding in most emerging markets funds, for example.

I know some folks here own commodities funds, and those are usually loosely correlated with the market and can act as inflation hedges.
REITs used to be considered hedges. I'm not sure if they still are. But when I got into mine, that was the reason.
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Old 05-26-2010, 09:44 AM   #12
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REITs used to be considered hedges. I'm not sure if they still are. But when I got into mine, that was the reason.
I think they are still fairly un-correlated with other stock indexes based on some recent spreadsheeting I did. I don't think of REIT's as a hedge as much as a fairly uncorrelated asset class that reduces overall portfolio volatility. Hmmm, I guess that IS a hedge!
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