After last week's volatility, I thought I'd add an interesting article to last years discussions that I stumbled upon, written by a retired investment advisor (bought his first stock in 1958!!) that discusses hedging (see below).
On another note, I'm not sure if anyone used the right hand "green box" shown above and had VIX options ahead of time....did they work out as planned?
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Summary
A lifetime of experience has told me that there is no really effective way to hedge actively against corrections or bear markets.
To expand upon this point of view, I look at implications of a hedge posed by Mad Hedge Fund Trader, a pretty reasonable and simple one.
The problem with hedges is their dependence upon timing and your opinion about when the market, even if overpriced, will correct. Taxes also don't help.
A comparison with active hedging gives cash an advantage and more flexibility in the more likely scenarios, and increasing cash returns narrow the comparison with stocks.
The only other alternative - especially for the young - is simply to buy and hold and ignore market events.
The elevated valuation of the stock market has clearly caused many investors to consider finding a way to hedge their portfolios, and this interest in hedging will undoubtedly grow as investors look at the effect of the recent sell-off on their portfolios. Caution at the present moment is understandable - and a calculated caution is always a good idea - but is there really an effective way to hedge?
source:
https://seekingalpha.com/article/4143438-real-hedge-cash
