Hedging Strategies for your equity portfolio.
If you’ve been invested in some form or fashion in equities (stocks) over the last several years or longer you have probably accumulated some nice gains. We will look at ways to protect these gains, or as some call it “hedge our position”. There are many ways to hedge against a market downturn or the drop in individual investments. While none of these strategies is guaranteed to insure against losses, they can be an effective way to limit or in some instances completely offset losses. We will look at two separate scenarios here.
Hedging strategies for a diversified portfolio:
- Increasing your cash position %, a couple easy ways to accomplish this:
- Discontinue reinvestment of dividends and capital gains
- When re-balancing, lower the % reinvested in equities
- Advantages, less exposure if market drops and extra cash to buy equities at reduced prices
- Disadvantages, if market continues to rise you will miss out and low yields on cash equivalents
- Taking more defensive positions
- Allocate more assets to bonds
- Look at investments that may fare better in a weak market such as; commodities, consumer staples and utilities
- Look overseas, there may be opportunities to invest in other countries or regions
Hedging Strategies for individual stocks
- If taking profits in a stock is not viable for taxes or other purposes, purchasing a Put Option can be an effective short term (typically 1 to 12 months) hedge.
Tom Ferrell, CFP®