Portfolio hedgers

[wildcat]

Some like gold, some like out of the money puts, etc. Each has a downside. Has anyone added or thought of adding a permanent small % in the short ETFs - inverse S&P for example?

 

[Animorph]

I've been using FSAGX and BEARX as well as cash to hedge this dip. You could sort of use BEARX as a permanent %, but these are temporary for me, just insurance against a big drop as I enter retirement.

I might be OK with a long-short fund in a permanent position, but that's not really a hedge. Why permanently cancel out part of your returns?

For the future I'll try to take a year or two of cash out while things look good and spend it or reinvest it when the market is down. That'll probably be it.

Dan

 

[haha]

I have not been very successful hedging. Looking back over many years, my successes have largely come from investing in a theme that I believed in, and individual security analysis to put the theme into action.

I also think some personality traits are incompatible with investment success. If you think something is true, don't mess around forever, follow through.

Ha

 

[chinaco]

Diversification!


IMHO - if one wants some commodities (funds), other assets (or techniques) in their portfolio as a hedge... it seems reasonable. Timing is the problem. Keep it on the longer-term portfolio targets, rebalance, and do not attempt to time the markets.

 

[innova]

Right on.

A basket of low-correlated, high-returning assets in combination will serve nicely.

Examples:
US small vs. US large
REIT vs. US large
Int vs. US (though the correlation has been rising)
US bonds vs. Total market
Commodities(ccf) vs. Total market
Gold vs (dubious as gold has zero long-term expected return)

Building portfolios this way has the enormous advantage of not needing to rely on market timing or short-term predictions to protect yourself.

 

[tomintucson]

What ha said. (Modest and well-spoken.)

The difference for me is that I absolutely don't believe I'm smart enough to select individual securities. It seems that an inordinate number of the world's most brilliant pursue careers in finance, because, well, that's where the money is. I simply don't want to be caught holding the bag on the other side of their trades.

So I tend instead to use ETFs and managed funds for what I call strategic asset allocation. It's not for everyone, but who am I to argue with my very significant success? Sorry, sounds like boasting. How do I say that the investment gods have smiled down upon me? Would that I were so lucky in love...

Tom

 

[ERD50]

I've done a fair amount of analysis regarding hedging. My simplistic view is this:

A) It costs money to hedge.

B) If you could improve your overall return by hedging, everyone would do it. If they did, hedging would become so expensive that it would be a break-even proposition at best - which is why 'A' is true.

C) If you feel your position is so risky that you require a hedge - then your position is too risky. You would be better off reducing your exposure to risk than buying protection against the risk.

D) IIRC some of those asset allocation gurus say that the best way to hit your risk tolerance level is with a small % of the higher risk stuff. That is supposedly better than a larger amount of slightly riskier stuff, but I forget the details or who said it, probably has to do with 'alpha', anyhow....

E) Because of A B and C, I will often SELL hedges, rather than buy them. Do you expect that the people selling hedges would do so w/o adequate compensation for taking the risk off your hands?

About the only time I try to hedge a position is when I don't want to sell for tax reasons, and I see a bump in the road ahead that could send the stock one way or the other. The hedge may cost less than the tax implications of selling, and I might miss the run-up if I just sell.

Now, diversification is another story. That is good, unless you have a crystal ball.

-ERD50