Hedging your Bets
Apr 26, 2025
Last week I wrote about the tendency for investors to get a little lazy when it comes to rebalancing or maintaining their portfolio. There is nothing like a bull market to induce a more relaxed approach.
Thanks to a changing world and a decline in globalisation and supply chains, we think there will be greater bouts of volatility over the coming decade. Volatility tends to cluster meaning there are periods like the past 2 weeks where markets swing up and down in greater amounts. Two and even three percent swings in a day become the norm as investors try to understand how they should position themselves given the ever changing circumstances.
By increased volatility we mean we will most likely see more periods like the past 2 weeks or deeper swings, for example, days where three, four or even five percent days become more prevalent.
This is why we have discussed hedging (and to a lesser extent incorporating some aspects of technical analysis).
Hedging is best done systematically or not at all. You can of course hedge at certain times but the chances that you get it right enough times to add to your portfolio returns is probably more luck than skill.
The alternative we discuss is thinking about hedging like insurance. Yes, you see those monthly payments as annoying, but it is in times of crashes or high volatility that insurance really pays off. But the important aspect of the insurance type approach is working out how to do it effectively and by effectively we mean that it is not a cost but a benefit to your overall returns.
We will be talking about hedging more in the future.
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