Hedge Hedge Hedge.

During the most recent downturn the markets are down 20%, my portfolio is up 3% during the same time period. I wasn’t as aggressive with hedges this year as I was during the 2008 swoon. My long term hedges worked, but I wasn’t position heavily for the short term. Perhaps the most important move I made was to go to cash in my 401k during the debt ceiling debacle. If you listen to the talking heads they want you to invest and forget your portfolio, they say over the long haul you will do better than market timers. This is a complete and utter lie. While I do agree when things are going well you can pay less attention to your investments, when things are as bad as they are now, you need to watch and more importantly act before a bad situation turns worse.

We all knew the country was in trouble, we all knew that Europe was struggling. Wages are down, unemployment is up, debt is unsustainable, yet the talking heads, the mutual fund managers never caution, they never sell your retirement account to wait in cash just in case the markets drop precipitously. When things look as bad as they did during the debt ceiling fiasco you can’t afford to sit idly by. You need to act!

I’ve said it before and it must be said again. HEDGE!
If you can’t, or don’t know how- go to cash. To make up for your temporary move to cash you can increase the amount you contribute to your 401k to the max. Just in case things don’t fall off a cliff and if they do you are still averaging down with your weekly contribution.

You can’t hedge in your 401k account but you can open a regular IRA and purchase inverse ETF’s and Puts in that account.
First thing you need to do in order to hedge is find out what that fund you have really owns. Is it heavily weighted in technology, small caps, energy?
Once you find the breakdown, you can purchase an inverse ETF in order to manage risk. An inverse ETF is an ingenious way to short; they go up as the market sector they represent goes down. For example, if you own a mutal fund that has 30% financial stocks, you would purchase SKF, or FAZ to hedge in your
Always hedge your 401k in a standalone account. Do the homework, find out what you own and find a creative way to hedge it in another account.

This market, the world and government is too volatile to just “set and forget” your investments.
Don’t get complacent; don’t rush in to buy all at once just yet. If Europe defaults we could easily drop another 50% this year!

If you do go long, you guessed it- hedge!

As far as Europe goes, lets not panic just yet, all is not lost; if you are long cash- you may want to consider buying the S&P 500 at some point. Currently, it yields more than the 10-year Treasury note. This is a rare event in the investing world. Take note of this factoid, but don’t run out and purchase the SPY just yet.

Here is an idea on a hedging strategy.
Purchase way out of the money puts on high flying stocks.

My favorite hedge?
As I mentioned on my previous post, I am long way OTM puts on (AAPL) Apple, if the market swoons, its going to take AAPL along with it.
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