Best of the Week
Most Popular
1. Investing in a Bubble Mania Stock Market Trending Towards Financial Crisis 2.0 CRASH! - 9th Sep 21
2.Tech Stocks Bubble Valuations 2000 vs 2021 - 25th Sep 21
3.Stock Market FOMO Going into Crash Season - 8th Oct 21
4.Stock Market FOMO Hits September Brick Wall - Evergrande China's Lehman's Moment - 22nd Sep 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
7.AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
8.Why Silver Price Could Crash by 20%! - 5th Oct 21
9.Powell: Inflation Might Not Be Transitory, After All - 3rd Oct 21
10.Global Stock Markets Topped 60 Days Before the US Stocks Peaked - 23rd Sep 21
Last 7 days
CATHY WOOD ARK GARBAGE ARK Funds Heading for 90% STOCK CRASH! - 22nd Jan 22
Gold Is the Belle of the Ball. Will Its Dance Turn Bearish? - 22nd Jan 22
Best Neighborhoods to Buy Real Estate in San Diego - 22nd Jan 22
Stock Market January PANIC AI Tech Stocks Buying Opp - Trend Forecast 2022 - 21st Jan 21
How to Get Rich in the MetaVerse - 20th Jan 21
Should you Buy Payment Disruptor Stocks in 2022? - 20th Jan 21
2022 the Year of Smart devices, Electric Vehicles, and AI Startups - 20th Jan 21
Oil Markets More Animated by Geopolitics, Supply, and Demand - 20th Jan 21
WARNING - AI STOCK MARKET CRASH / BEAR SWITCH TRIGGERED! - 19th Jan 22
Fake It Till You Make It: Will Silver’s Motto Work on Gold? - 19th Jan 22
Crude Oil Smashing Stocks - 19th Jan 22
US Stagflation: The Global Risk of 2022 - 19th Jan 22
Stock Market Trend Forecast Early 2022 - Tech Growth Value Stocks Rotation - 18th Jan 22
Stock Market Sentiment Speaks: Are We Setting Up For A 'Mini-Crash'? - 18th Jan 22
Mobile Sports Betting is on a rise: Here’s why - 18th Jan 22
Exponential AI Stocks Mega-trend - 17th Jan 22
THE NEXT BITCOIN - 17th Jan 22
Gold Price Predictions for 2022 - 17th Jan 22
How Do Debt Relief Services Work To Reduce The Amount You Owe? - 17th Jan 22
RIVIAN IPO Illustrates We are in the Mother of all Stock Market Bubbles - 16th Jan 22
All Market Eyes on Copper - 16th Jan 22
The US Dollar Had a Slip-Up, but Gold Turned a Blind Eye to It - 16th Jan 22
A Stock Market Top for the Ages - 16th Jan 22
FREETRADE - Stock Investing Platform, the Good, Bad and Ugly Review, Free Shares, Cancelled Orders - 15th Jan 22
WD 14tb My Book External Drive Unboxing, Testing and Benchmark Performance Amazon Buy Review - 15th Jan 22
Toyland Ferris Wheel Birthday Fun at Gulliver's Rother Valley UK Theme Park 2022 - 15th Jan 22
What You Should Know About a TailoredPay High Risk Merchant Account - 15th Jan 22
Best Metaverse Tech Stocks Investing for 2022 and Beyond - 14th Jan 22
Gold Price Lagging Inflation - 14th Jan 22
Get Your Startup Idea Up And Running With These 7 Tips - 14th Jan 22
What Happens When Your Flight Gets Cancelled in the UK? - 14th Jan 22
How to Profit from 2022’s Biggest Trend Reversal - 11th Jan 22
Stock Market Sentiment Speaks: Are We Ready To Drop To 4400SPX? - 11th Jan 22
What's the Role of an Affiliate Marketer? - 11th Jan 22
Essential Things To Know Before You Set Up A Limited Liability Company - 11th Jan 22
NVIDIA THE KING OF THE METAVERSE! - 10th Jan 22
Fiscal and Monetary Cliffs Have Arrived - 10th Jan 22
The Meteoric Rise of Investing in Trading Cards - 10th Jan 22
IBM The REAL Quantum Metaverse STOCK! - 9th Jan 22
WARNING Failing NVME2 M2 SSD Drives Can Prevent Systems From Booting - Corsair MP600 - 9th Jan 22
The Fed’s inflated cake and a ‘quant’ of history - 9th Jan 22
NVME M2 SSD FAILURE WARNING Signs - Corsair MP600 1tb Drive - 9th Jan 22
Meadowhall Sheffield Christmas Lights 2021 Shopping - Before the Switch on - 9th Jan 22
How Does Insurance Work In Europe? Find Out Here - 9th Jan 22
MATTERPORT (MTTR) - DIGITIZING THE REAL WORLD - METAVERSE INVESTING 2022 - 7th Jan 22
Effect of Deflation On The Gold Price - 7th Jan 22
Stock Market 2022 Requires Different Strategies For Traders/Investors - 7th Jan 22
Old Man Winter Will Stimulate Natural Gas and Heating Oil Demand - 7th Jan 22
Is The Lazy Stock Market Bull Strategy Worth Considering? - 7th Jan 22
METAVERSE - NEW LIFE FOR SONY AGEING GAMING GIANT? - 6th Jan 2022
What Elliott Waves Show for Asia Pacific Stock and Financial Markets 2022 - 6th Jan 2022
Why You Should Register Your Company - 6th Jan 2022
4 Ways to Invest in Silver for 2022 - 6th Jan 2022
UNITY (U) - Metaverse Stock Analysis Investing for 2022 and Beyond - 5th Jan 2022
Stock Market Staving Off Risk-Off - 5th Jan 2022
Gold and Silver Still Hungover After New Year’s Eve - 5th Jan 2022
S&P 500 In an Uncharted Territory, But Is Sky the Limit? - 5th Jan 2022

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

The Ultimate Stock Market Insurance Policy

InvestorEducation / Options & Warrants Jul 15, 2010 - 10:37 AM GMT

By: Investment_U

InvestorEducation

Best Financial Markets Analysis ArticleKarim Rahemtulla writes: It’s a question that trickles in consistently from Investment U readers:

“How do I weight my portfolio properly in terms of asset allocation that offers a mix of upside potential and downside protection?”


Right off the bat, I’d say much of it depends on your individual situation and how old you are.

  • For example, if you’re older, you’ll want to have more assets in bonds, cash and income-generating investments – i.e. safer assets designed to protect existing wealth and grow it consistently.
  • On the other hand, if you’re younger and have more time until you retire, you can afford to take a few more risks – i.e. in growth stocks and a few more speculative investments.

At this point, I should stress categorically that you should never risk more than you can afford to lose.

In short, there’s no one, easy answer. But I’ve recently been road-testing a new portfolio, designed to provide the ultimate stock market insurance policy. And here it is…

A Critical Investment… But One That Rarely Pays You Back

Nobody likes to lose money. But when you take out an insurance policy, that’s essentially what happens on many occasions. It’s the investment you hate to make because it never seems to pay you back.

However, sometimes it’s worth losing some money in order not to lose a lot of money. You gripe about how much it costs, but insurance allows you to sleep better at night, so you pay it anyway. It’s the best way to protect yourself against a catastrophe.

In Florida, for example, when you buy insurance on a $300,000 house, you pay around 1% of the replacement value. It’s a policy that will likely never pay off, but 1% is a small psychological price to pay – even on an asset that may not appreciate for a while.

So why should your stock portfolio be any different?

If you want insurance on your portfolio, you’ll have to pay there, too. If you don’t, you’ll leave yourself at the mercy of a volatile and unforgiving market. And why leave yourself open to disastrous losses when they can be avoided?

So to come back to our original question at the top: “How do I weight my portfolio properly in terms of asset allocation that offers a mix of upside potential and downside protection?”

I’ll show you…

Can You Really Have Upside Gains and Downside Protection? You Bet…

For several months, I’ve been toying with different options strategies, portfolio allocations and various market instruments to see what would work best in case of a market meltdown.

My goal is to enjoy both upside gains and downside protection. In short, outperform the market on the way up and lose less than the market on the way down.

This means I’ve incorporated conservative positions like cash, plus more speculative positions like stocks and options.

I threw the portfolio out there at the best (i.e. worst) time – during the market’s recent decline. It was a real case of “sink or swim?” And the thing is like Michael Phelps! The results were much better than I expected.

Your Five-Asset Portfolio Insurance Policy

From high to low this year, the market has dropped by 11%. But my experimental portfolio has only shed 3%. It’s got the following allocation…

  • Cash – 35%
  • Stocks – 30%
  • Deep-in-the-Money Covered Calls – 20%
  • LEAP Options (long) – 10%
  • Short Positions (both LEAPS and other options) – 5%

So what companies are in the portfolio?

~ Stocks: On the stock side, about 60% of the positions are made up of low-beta names like Wal-Mart (NYSE: WMT) and healthcare firm Bristol-Myers Squibb (NYSE: BMY).

The remaining 40% is comprised of higher-beta companies such as resource stocks and small caps.

~ Shorts: Most of the short positions were executed using both long and short-dated puts on the S&P 500, with varying strike prices.

Some of the S&P strike prices were close to at-the-money (near the current levels of the index), while others were quite a bit out-of-the-money.

The latter offers protection in the case of an unpredictable, stomach-churning short-term collapse – i.e. “black swan” trades. And while they might lose money, since catastrophic collapses aren’t frequent occurrences, it’s an insurance policy that allows me to sleep better at night.

The main reason for the portfolio’s market outperformance was the short positions and covered call trades. Both acted as counter-trend investments, which increased in value as the market went lower.

The Watchword: Volatility

So what happens if the market dips even lower or heads higher?

Well, I’m still in the observation phase of this model portfolio’s effectiveness, so I’ll keep you posted.

What I can say, however, is that volatility could be our friend here. Yes, that’s right. While many investors run scared as volatility kicks higher, it could act like rocket fuel, since it will boost the value of the short options trades more substantially. Stay tuned for more updates on how this portfolio works out.

Good investing,

Article - http://www.investmentu.com/2010/July/the-ultimate-stock-market-insurance-policy.html

Karim Rahemtulla

http://www.investmentu.com

Copyright © 1999 - 2008 by The Oxford Club, L.L.C All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Investment U, Attn: Member Services , 105 West Monument Street, Baltimore, MD 21201 Email: CustomerService@InvestmentU.com

Disclaimer: Investment U Disclaimer: Nothing published by Investment U should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investment advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication or 72 hours after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Investment U should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Investment U Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in