Every client has a different attitude about risk and the length of time before they need to start drawing from their portfolio to fund lifestyle ambitions and other priorities.  While not appropriate for all investors, hedging can be an effective way to reduce volatility of returns.

During the financial crisis of 2007-2009, the S&P 500 lost 57% of its value from peak to trough.  Many investors were so distraught that they pulled their investments at precisely the wrong time.  The bull market from the trough of March 2009 through February 2020 quadrupled the value of the S&P 500, a run that many investors completely missed due to “Investment PTSD”.  Imagine in 2007 that you were planning to retire in 2009 with a net worth that would provide for a comfortable retirement and were completely invested in the stock market!

A properly constructed hedging strategy can act as insurance against a precipitous drop in the markets.  We typically construct a hedge using put options on ETFs that track broad market indices such as the S&P 500,  Nasdaq 100 or ETFs relevant to the strategies within which a client may be invested.  As with insurance, there are costs (option premiums) and “deductibles” (effectively the difference between the current market price and the strike price), but if the hedging strategy can provide some protection during a sharp correction or bear market, it may preserve principal and provide the emotional fortitude to stay with your investment plan for the long-term.