In a world of uncertainty what should investors do?Submitted by LWM | Linden Wealth Management LLC on March 24th, 2017
To hedge, sell or stay the course ... If there was a gauge or some way to measure investor anxiety it would currently give off a high reading. A sustained run has equities sitting near all-time highs. Valuations by most measures are stretched. The political climate seems poisoned undermining confidence. It doesn't matter what your affiliation. Worries are acute but what to do. Should investors hedge to preserve gains, sell or stay the course?
Hedging is a form of insurance. You pay premiums to insure against loss. Put options can be effective when hedging a security. The holder has the right to sell at a higher price. Charles Schwab recently published an article on how you could hedge a $1mm portfolio. I'm including a link. This strategy is expensive. You have to buy a lot of options that expire soon requiring you to buy even more to remain hedged.
Selling is easier but likely generates capital gains unless there is an offset. It also leaves you in cash and underinvested. Counter to a plan’s objective for capital appreciation.
A bigger problem is timing. Downturns don’t announce themselves. They happen abruptly. This alone makes them hard to anticipate and guard against. The smarter course would be to study and analyze their true effects.
The last correction happened between December 2015 and February 2016. The market declined 14+%. Investor psychology turned negative. And then, before you knew it, the market recovered. This experience is the norm. As quick as they come they go. The average correction lasts fewer than 5 months. They are also frequent. On average once a year. Imagine trying to hedge or sell to protect against something that comes and goes quickly and frequently.
Uncertainty and anxiety are serious emotions. They shouldn't be dismissed but nor should an investor give into them. Relying on a sound plan and disciplined investment process builds investor confidence. A confident investor is more likely to stay committed to their plan. We know investors who stay on track produce better outcomes.
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