I’ve received questions relating to account volatility so this post is probably well timed.
The purpose of our hedging strategy is to take a position in securities in the accounts we manage that will rise in value should the stock market fall. The value of the assets that increase in value should the market decline will offset the decline in the value of stocks, thus buffering the decline so you don’t take as big of a hit had you done nothing.
Essentially, we’re taking a much more aggressive approach to preserving account value by reducing downside volatility. Our hedging strategy does not include the use of Option or Futures. The value of the portfolio could still decline in value, especially on days where the stock market falls significantly but the decline would be a fraction of the loss had the account not had the hedges.
Should the market rise while the hedges are in place, the account would appreciate at a slower relative pace as well, since the hedges would act as a drag to upside returns.
I do not expect that hedging will be a frequent practice. Hedges are expected to be utilized with the Intermediate or Long Term market values are at risk.
This is our way of addressing account volatility in what I believe is the most effective way possible and I must admit, my response to doing our best to never allow a situation like our experience in 2008 to happen again.
My goal is to aggressively attempt to maintain account values near their highs by keeping declines to a modest level. We don’t need to be too concerned about making money when the market is moving higher, our proprietary model has done an excellent job of that. My motivation is to see that clients have some downside protection which also feels great when the market falls.
Be Careful Out There
Brad