Three Ways To Hedge The Market

| June 7, 2010 | 0 Comments

It’s no secret the markets are struggling right now.  In the last six weeks, the markets are down over 10%.  It’s the first 10% correction in over a year.

The markets are highly volatile.

We’ve seen a number of 200 and 300 point daily swings.  And who can forget the 1,000 point mini-meltdown.  Investors have needed strong stomachs (and lots of antacid) recently.

I could go on for pages about why we’re moving lower… but you probably already know that.

Just pick up a paper and read the front page.  Greek and Spain defaulting on their debts.  The Euro plummeting in value.  Oil spills destroying the fishing industry.  Even a horrible jobs report.  You don’t need me to rehash the news for you.

All of it adds up to struggling global economic growth.

The uncertainty in the markets has been crushing investor optimism. Without the greed brought by optimism, all that’s left is fear.  Right now, investors are wondering if we might see another “drop off the cliff” in the markets.

The potential to hit 6,000 on the Dow is just as good as hitting 14,000… and that’s a scary thought.

If we hit 6,000 on the Dow, a lot of investors will be absolutely wiped-out.  Retirements will be postponed.  College educations might not be possible.  A vacation home in the mountains or on the beach will remain only a dream.

To protect their futures, many investors are now looking to hedge their portfolios.

But how do you do it?  That’s a great question.

For those of you who don’t know, hedging a portfolio is a way to protect your investments against major loss.  It’s kind of like buying fire insurance for your home.  You hope you never need it, but you’re glad you have it.  When properly hedged, some money managers can make money in both up and down markets.

Here’s the challenge.  You can make hedging incredibly complex… or you can keep it simple.

I say why not keep it simple?

Here are three simple things you can do to “hedge” your portfolio today.

First, buy “defensive” investments.

At first glance, this strategy seems too simple.  Believe me, it’s quite powerful.  It’s a strategy used by many big money managers.  They take positions in industries able to withstand downturns in the market. Industries like utilities, food & grocery, or healthcare are all survivors.

Even if they’re not able to entirely sidestep a market downturn, they at least hold up better than most others.  This is an easy hedging technique that can be applied at any time.

Those of you experienced with options trading will find the next strategy useful…

Second, buy put options.

One of the easiest ways to profit from a falling market is by owning put options.  Put options are a lot like insurance.  You have to pay a small premium… but if the market falls, they pay off big.

Put options can soar in value.  These profits offset other losses in your portfolio.  Best of all, you can use put options to hedge a single stock in your portfolio, or the entire market!

If you’re not comfortable trading options, take a look at what’s next…

Third, buy inverse ETFs.

Inverse ETFs are designed to move up in value when a specific basket of stocks moves lower.  It’s an easy way to “short” a market without taking on all the risks of directly shorting a stock.

For example, the ProShares Short Dow30 (DOG) will rise in value when the Dow Jones Industrial Average falls.  There’s also ProShares Short S&P500 (SH), an inverse ETF for the S&P 500 index.  Now it’s easier than ever to hedge your portfolio in one trade.

What to do now?

Right now we’re seeing a correction in the markets.  Investors who hedged their portfolios are sleeping better than those who didn’t.

Remember, these aren’t techniques to become a millionaire from a falling market.  Hedging is about protecting your long investments.

Most importantly, investors implementing a proper hedging strategy will avoid the worst case scenario… a catastrophic loss.  Are you willing to roll the dice on your futures?  If not, take some time now to protect your portfolio with a sound hedging strategy.

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Category: Stocks

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The Dynamic Wealth Report works with a number of staff writers and guest experts who specialize in everything from penny stocks to ETFs to options trading. These guest analysts post under the 'staff writer' moniker for ease of use.

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