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Portfolio Hedging Strategies
Old 03-30-2018, 08:04 AM   #1
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Portfolio Hedging Strategies

Although my YTD portfolio performance was modestly positive, it was a bit unsettling to see that it was up almost 7% in the first 5 weeks of the year. Does anyone employ any kind of “Hedging” strategy to protect an extraordinary period of performance? It does not seem that a modified asset allocation would have helped as bonds were the worst performers during this time. I realize that raising more cash is the most obvious and cost effective answer but I suppose that there are some more sophisticated methods that others may use. Thanks for your feedback.
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Old 03-30-2018, 08:40 AM   #2
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My portfolio is the ultimate hedge against the banks and banksters, I borrow their money but don’t lend or invest in any of their investment devices.
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Old 03-30-2018, 08:56 AM   #3
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I use options to create diagonal bull collars on the SPY ETF regularly. The net effect is that I've created my own low cost variable annuity. The range I try to get is
Maximum gain loss: minus 10% to plus 30%
Likely range: minus 5% to plus 15%.


BTW, this has underperformed last year vs. the SPY but I've not lost any sleep either.


Warning: I've found that one out of 50 people I talk to have the economic training and mathematical chops to truly understand this. It's not something to "try" for the first time with critical retirement funds. I've been trading options since the mid 1980's.


A much easier way to do this is to annuitize just enough income to support your most basic needs (include social security). Then let the rest ride in the markets. You may have a $60,000 budget but in a crisis you could spend $35,000 and survive. Annuitize the $35000 (include SS) and then put the rest in a mixed income fund like Wellington or Wellesley and you're done. I will likely do this as I get older and health concerns become more likely (immediate annuities get more attractive around age 70), but as a young ER pup, I foolishly think I'm doing OK health wise "for another year".


Your mileage will definitely vary - hope this helps.
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Old 03-30-2018, 08:59 AM   #4
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I would need a hedging strategy if I needed to "insure" the value of my portfolio at a point in the near term (e.g. if I needed the whole pot to buy a house in three months). Since, instead, my portfolio needs to last us for about 4 decades, buying "insurance" against a decline in value would be an expensive proposition.

I don't worry about short term ups and down in the value of the portfolio. If the actual value (adjusted for inflation) continues to rise (after smoothing out the noise), then we'll be alright. The costs of buying insurance to smooth out the line would lead to a lower real chance of growth, so it would ultimately be self-defeating. We depend instead on an appropriate asset allocation, rebalancing, and patience.
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Old 03-30-2018, 09:57 AM   #5
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Originally Posted by PoorOldCountryBoy View Post
I use options to create diagonal bull collars on the SPY ETF regularly. The net effect is that I've created my own low cost variable annuity. The range I try to get is
Maximum gain loss: minus 10% to plus 30%
Likely range: minus 5% to plus 15%.
Could you elaborate on this with an example giving the expirations and strikes of the options? Sound like you are buying longer term OTM puts and trying to defray the cost by selling shorter term OTM calls, which gives you downside protection with limited upside participation.
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Old 03-30-2018, 10:08 AM   #6
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My only hedging strategy is to rebalance more frequently... which ends up selling winning asset classes and buying losing asset classes.. admittedly benign but as a long-time equity investor I am comfortable on roller coasters.

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....A much easier way to do this is to annuitize just enough income to support your most basic needs (include social security). Then let the rest ride in the markets. ...
Wouldn't a more conservative AA achieve the same end and preserve capital for heirs if that is an objective? IOW, if someone's pension and SS are 25% of their spending then they would hae a more conservative AA than someone whose pension and SS are 75% of their spending.
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Old 03-30-2018, 11:51 AM   #7
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TANSTAAFL. Less risk = less reward. Look at anyone's efficient frontier graph to see how it works.
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Old 03-30-2018, 01:22 PM   #8
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I don’t worry about market fluctuations. Our portfolio has grown substantially over the last 18 years retired, even with two very nasty bear markets and even after inflation.

I expect to give gains back any day now - but I also expect such drops to be temporary.

In the meantime, I’ve got tons of cash and near-cash on the sidelines to smooth over temporary rough spots so I can ignore short-term fluctuations and focus on the long term with my retirement investments. I generally rebalance no more than once a year to maintain consistent risk level.
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Old 03-30-2018, 01:40 PM   #9
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I don’t worry about market fluctuations. Our portfolio has graph substantially over the last 18 years retired, even with two very nasty bear markets and even after inflation.

I expect to give gains back any day now - but I also expect such drops to be temporary.

In the meantime, I’ve got tons of cash and near-cash on the sidelines to smooth over temporary rough spots so I can ignore short-term fluctuations and focus on the long term with my retirement investments. I generally rebalance no more than once a year to maintain consistent risk level.
Exactly our situation except we're only 15 years into retirement. We've been surfing the market waves since 1987, always hanging on and always recovering. We too expect to get whacked soon, then we'll wait a while and all will be well again.
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Old 04-05-2018, 02:59 PM   #10
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Most of the time, depending on the robustness of capital preservation.
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Old 04-05-2018, 03:06 PM   #11
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Could you elaborate on this with an example giving the expirations and strikes of the options? Sound like you are buying longer term OTM puts and trying to defray the cost by selling shorter term OTM calls, which gives you downside protection with limited upside participation.
That is correct. If you look at prices right now they will be expensive but if the position is set up during a period of low volatility it works pretty well. I'm quite willing to risk missing out on a parabolic increase in order to protect against a huge downside. It is expensive but much more flexible than locking myself into an annuity.
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Old 04-05-2018, 03:34 PM   #12
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I just rebalance once a year. No hedging for me.

Unless you count when the market is in turmoil, I look for a new hobby to keep occupied til things settle down.
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Old 04-05-2018, 04:41 PM   #13
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I don’t worry about market fluctuations. Our portfolio has grown substantially over the last 18 years retired, even with two very nasty bear markets and even after inflation.

I expect to give gains back any day now - but I also expect such drops to be temporary.

In the meantime, I’ve got tons of cash and near-cash on the sidelines to smooth over temporary rough spots so I can ignore short-term fluctuations and focus on the long term with my retirement investments. I generally rebalance no more than once a year to maintain consistent risk level.
+1 with two caveats.

1. I'm a newly minted retiree, so we haven't had to ride out any financial tsunamis (yet).

2. Only pounds of cash, no tons (yet). But those pounds of cash and assets cover us for easy 5 years - - - could stretch that to 8-10 years should we experience a zombie apocalypse.
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Old 04-05-2018, 06:00 PM   #14
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Hedging strategy? I don't know. I don't think so. I have money spread out among different types of investments. I have a buffer of extra money every month, so I like that. But I take my best ideas and I put a good percentage of the portfolio in them. When the SP500 is up, half my investments might not be and vice versa.

But I don't do anything fancy I don't think. I just do the best I know how.
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Old 04-07-2018, 05:56 PM   #15
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I don't hedge either. Being a long term investor it would be a waste of money for me. I have several years of cash and equivalents to ride out the occasional big hit in the markets. By the way, I'm firing in 3 weeks.
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Old 04-07-2018, 10:30 PM   #16
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I don't hedge either. Being a long term investor it would be a waste of money for me. I have several years of cash and equivalents to ride out the occasional big hit in the markets. By the way, I'm firing in 3 weeks.
Congrats!
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Old 04-08-2018, 12:02 AM   #17
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I don't hedge either. Being a long term investor it would be a waste of money for me. I have several years of cash and equivalents to ride out the occasional big hit in the markets. By the way, I'm firing in 3 weeks.
Awesome! I think you will like it.
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Old 04-08-2018, 05:38 AM   #18
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TANSTAAFL. Less risk = less reward. Look at anyone's efficient frontier graph to see how it works.
Ah, another Heinlein fan. My main hedging strategy is to only need a <2% WR.
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Old 04-08-2018, 07:13 AM   #19
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Diversify, never go all-in in stocks or bonds, rebalance tactically. Basically what Paul Graham advised 70-odd years ago.

It protects against outlier performance both ways, up and down. And don't worry if you get it exactly wrong, that will happen. More important is getting it roughly right.
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Old 04-08-2018, 08:16 AM   #20
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Diversify, never go all-in in stocks or bonds, rebalance tactically. Basically what Paul Graham advised 70-odd years ago.

It protects against outlier performance both ways, up and down. And don't worry if you get it exactly wrong, that will happen. More important is getting it roughly right.
I like this ^^^

I read somewhere and I always try and remember it...

“Never let a perfect plan get in the way of a very good one”
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