Swinging for...a Hedge

It's true. Back in the Great Buying Panic of the 1990s, going 100 percent long (or more) of, say, the S&P 500 or QQQ was about all an investor needed to do to look like a genius.

It's true. Back in the Great Buying Panic of the 1990s, going 100 percent long (or more) of, say, the S&P 500 or QQQ was about all an investor needed to do to look like a genius. Gosh, in those days, in writing an “Investing 101”-type article for individual investors, we asked the author of a groundbreaking book on investing, “What's the best way to make money in stocks?” His answer: “Never sell.” OK, we get it: Buying the market, or some ETF, and holding on for decades is probably a more prudent strategy than jumping in and out of stocks and funds in an effort to chase whatever is working — and thereby incurring high trading costs and taxes (if not outright losses) in the process.

The author's response was offered in what seems like a different investing galaxy, one that is far, far away. Despite the nice run recently (the Dow has set an all-time high, and the S&P 500 is back at its six-year high), most financial advisors and their clients are feeling a little more risk adverse. The thought of going out and backing up the truck for, say, QQQ, no longer thrills. Times have changed and hearts and minds along with them. Baby boomers, who have begun to retire in great numbers, can't simply go long and hope that time will bail them out. (Remember Keynes's quip: “In the long run, we are all dead.” That's never been more true — for a certain cohort, anyway.)

As a result, more advisors are offering their clients “alternative” strategies for not only making money, but also for preserving it. It's called hedging, and there are now more products and strategies than ever available for the retail set to do. And we're not talking about hedge funds or other wild and wooly limited partnerships either. Rather, transparent and liquid investment vehicles that are used to create low-correlated, absolute-return strategies. Consider the following pages a toolbox for helping you help your clients grow their pile and also protect it at the same time.

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