Don't market time, just hedge it

by Jay Pestrichelli on September 4th, 2013

Timing the market has always been something we’ve advised against at Buy and Hedge. However we also recognize that avoiding the times when the market declines can dramatically improve returns. In chapter 5 of our book we outline 2 studies that help put that into perspective.  One study looks at avoiding the 10 worst days and one looks at avoiding the 4 worst quarters.
The S&P was up a total 13.6% between January 2001 and December 2010. If you could have avoided the 10 worst days during that period your returns would have been a gain of 132%.  And if you could have avoided the 4 worst quarters returns would have been a gain of 126%.
These dramatic differences certainly temp us to try to time the market and avoid those bad times. The compounding effect of those drawdowns certainly make it a long and hard journey to recovery. Unfortunately, it is foolish to believe that one can avoid the big down quarters. Even the very smartest market timers will tell you they are 75% accurate at best. Our years of experience tell us that for most, market timing is a loser’s game. So instead, we focus on preserving our capital when the market goes through these downturns.  We do this by hedging.
Even though no one has really needed the benefits of hedging the past two years, it is a tactic that is also tough to time. We always recommend to keep hedges in place with our rule #1: Hedge every investment. You should buy your protection when you don’t know if you need it vs. only buying it once you realize you wish you had it.  Hedging costs can be prohibitive if only bought when you become fearful. The markets can be unforgiving to those that buy protectin during times of fear.
As we get to September expiration, we know many of you will have hedges that are going to expire. While you may be tempted to wait to put off replacing those worthless hedges until the markets look like things are going to correct, we highly encourage you not to.  Follow a plan of protecting your assets on a regular basis so when you need it, you already have it.

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