MARKET MADNESS

Traders How-To Guide for Dominating the Markets in 2021


Never Again Fear a Stock Market Crash

Ryan Jones | Option Strategist

Hedging your stock portfolio is important for many reasons. The obvious reason is to prevent huge losses should stocks crash or suffer is significant correction. Years of gains can disappear in an instant.
This is the obvious reason. What most traders and investors don’t understand are the actual long-term ramifications of crashes on your overall wealth. When stocks crash, it affects your portfolio’s ability to efficiently compound. This isn’t just about preventing short-term losses. This is about creating more efficient exponential growth. The long-term result of avoiding a portfolio drop when markets crash is astonishing.

Here is SPY going back about 25-years. I first posted this graph in January of 2020, BEFORE stocks crashed again!
When you bring compounding into the picture, you really start to feel the true impact major market corrections and crashes have on your portfolio over a 25-year period.
If you can increase your average annual return from 10% annually (with corrections and crashes) to 20% annually, the end result is $3.2 Million over 21-years when starting with $100k invested in the broad market.

Here is a comparison of $1,000 invested in SPY with and without avoiding the market crashes:
Is hedging important? More than most investors realize. It is not an option. If you have a stock portfolio, you need to hedge.


Common Hedges That Don’t Necessarily Hedge Anything

Do a quick internet search on hedging and you’ll find all sorts of ideas and methods used to hedge against a market crash. Unfortunately, most of them are ineffective at best, and in some cases, actually INCREASE your risk during a major market correction or crash.

Here are a few that you’ll find, most are not actually hedges:

Allocate a Portion of Your Capital to Cash
Buy Gold or Silver
Invest in a Bearish ETF
Time the Market
Cost Average When Market Moves Down
Buy Put Options

Do any of these sound familiar. Let me briefly explain why most of these are not actually hedges against a major market correction or crash.


Allocate a Portion of Your Capital to Cash

This Means Timing the Market Overall and Diminishing Returns. When should you put a portion of your portfolio in cash? Now? Later. What happens if you are wrong and you miss out on one of the biggest bull markets ever?

This is not a hedge, it is simply investing less, which means making less. And, what you have invested will still suffer in a market crash.


Buy Gold or Silver

Buying gold or silver is super popular. But it isn’t what the hypesters want you to believe so you’ll buy it from them. It is not truly a hedge against significant market corrections or crashes, and in some cases, may INCREASE your overall risk
Red line is SPY, purple is a Gold ETF. Notice in 2007 and 2008 as stocks began to come down, so did the gold ETF. You would have lost in stocks & gold. Gold did begin to recover sooner than stocks, but by the time stocks hit the bottom, the recovery in the gold ETF only made it back to where it was when stocks started to move down in the first place. The net gain from the gold ETF at the bottom of the stock market crash was zero. You suffered the entirety of the crash.

Moreover, if you are always long gold in order to always be hedged, the time period between 2012 and 2016 saw the gold ETF drop significantly, offsetting much of the gains in SPY during that same time.
Gold and silver cannot be relied on as true hedges, and can actually increase your risk.


Invest in a Bearish ETF

Bearish ETFs, or “inverse stock ETFs” move higher when stocks move down.
Sounds like the perfect hedge, doesn’t it?

Actually, I cringe when I hear so-called professionals recommend putting a portion of your portfolio in a bearish ETF as “diversification” or a hedge. Moreover, I feel sorry for their clients who expect professional, knowledgeable advice.

Just a little thought obliterates the logic behind this so-called “hedge”.

If I invest a portion of my portfolio in a bearish ETF instead of stocks, it is equivalent of simply moving a portion of my portfolio into cash.

As stocks move higher, my bearish ETF moves lower, creating LOSSES which are now offsetting my gains in the stocks.

Ridiculous.

If I have 10% in a bearish hedge, and 90% in stocks, I essentially have 80% in stocks and 20% in cash…almost the same exact thing. The difference is the 10% in the bearish hedge is offsetting 10% of the gains in my stocks…when I only had 90% invested…so only 80% is actually working for me.

Moreover, the 80% in stocks will still suffer from a major market correction or crash.
It doesn’t always outperform, but long-term, you’ll find this common (hint, one way to increase portfolio returns is to create a portfolio of high-performing, solid stocks that have consistently outperformed the broad market).

My point being is that selling insurance is lucrative, and buying it is expensive.

My Favorite Hedge Strategy for Making a Killing

I will be covering these topics and more during my presentation at the Market Madness live financial workshop on March 24th. Specifically, I will we sharing my thoughts on:

* Costly Mistakes of Not Understanding How to Properly Hedge
* Proper Hedging Strategies Need to be Implemented on a Well Diversified, Solid Portfolio
* Why there is no Perfect Daily Hedging Technique
* This Hedging Strategy Will Not Hedge Against Individual Stock Crashes
* The KEY to Proper Hedging Using Put Options is to PAY for Those Put Options
* My favorite hedge strategy for making a killing if stocks crash

About the Author

Ryan Jones
Company: Quantum Charts
Website: http://quantumcharts.com
Services Offered: Stocks, Charting Software, Strategies

  
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