Why A Portfolio Hedging Strategy Is Important To Dividend InvestorsA portfolio hedging strategy allows you to remain invested so that you can continue to receive dividends, without losing value in your portfolio if the stock market drops. With an effective hedge your portfolio value remains constant while the stock market drops in value. You can also design your hedge to increase in value if the stock market drops. Or you can establish a hedge where your portfolio sustains a shallower drop than that suffered by the stock market (for example, if you cannot afford to establish a full hedge). In any case you can use the money from the hedge to re-invest with the market reaching its lows. There are many ways to hedge a portfolio. These portfolio hedging strategies can involve one or more of the following mechanism: using put options, investing in futures, shorting stocks, investing in stocks or sectors that are inversely correlated to the stock or sectors in the portfolio, investing in different markets. As you can see some strategies are very complex, time consuming, and costly. But it doesn't have to be. There are hedging strategies that are simple and cost little to implement but are extremely effective. Every serious dividend investor should have a portfolio hedging strategy ready for implementation. There's a lot of crazy stuff going on in the world. News about government debt, quantitative easing, bankrupt European nations, continued recession, unemployment, and a lot more have caused stock market volatility and erratic performance. No one really knows what this holds for future stock market performance. Some very large countries and sophisticated hedge funds have been investing heavily in gold. Gold has been making record gains. Gold has been used as a safe haven in the past and the flight to gold could mean turbulent times ahead. The Only Way To Grow Your Portfolio Is To Avoid The Losses
Your investment assets are probably worth less than they were at the beginning of the century because of the two previous market crashes over the past ten years. An investor who had invested a lump sum in the S&P 500 in January 2000 and held it until 2010 would have suffered an 18% loss. The $3,689 in dividends received during those 10-years would have eased the pain a little, but the portfolio would have still have been worth 3% less than you had at the start. An investor who used a buy-and-hold strategy with regular periodic investments (called dollar-cost-average investing) experienced only a 3% growth over 10-years. During that period they would have received about $2,500 in dividends, increasing their portfolio’s performance to 13%. That doesn’t sound so bad until you realize that I’m not talking about annual returns. I’m talking about total return! A 13% gain over a 10-year period means you would have been making about 1% per year on your money. Your money would do just as well, and be exposed to less risk, by sitting in a money market account. A buy-and-hold dividend investing strategy assumes an appreciation of stock price. Many investment advisors probably assume an 8 – 10% growth rate to project their customer’s future asset value when developing retirement plans. You can see that the stock market’s actual performance over the past decade has been well below this assumption. The problem was the two bear markets during the past ten years that cut investment values by half. A 50% loss in value means you need a 100% return to make my money back. A 100% return may be possible, but it may or may not occur within the time period that you need. The only way to grow your investment assets and achieve your retirement goals in this type of environment is to avoid the huge 50% stock market drops. The only way to remain invested and avoid the huge 50% stock market drops is to have an effective portfolio hedging strategy. You need to avoid the losses, but be able to participate in the gains. A Simple, Effective, Low Cost Hedging StrategyAs a dividend investor I know you want and need to remain invested in the stock market because you want the dividend income and want to continue to drive the cost basis of your initial investment down.I have had the same concerns for over a decade and I decided to do something about it by creating my own hedge strategy to protect my investments. This strategy is not based on theoretical back testing. I crafted my process and refined it during the two crushing bear markets that cut the stock market’s value by 50% over the past ten years. I will tell you how I did it, step-by-step.
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