For Investors Worried About Market Corrections This Is Why You Hedge So That You Can Worry Less!

By Derek Moore

Source: ZEGA Investments Hypothetical Buy and Hedge Classic Risk Graph

Famous portfolio manager Peter Lynch gave a talk back in 1994 where he explained that corrections are normal, and you need to know the market is going to go down sometimes.

He continued that you should expect one about every 2 years. Corrections are defined as a pullback of -10% or more. He went on to state there have been 50 declines of -10% in 93 years (as of 1994). At the time I’m writing this, the S&P 500 Index is down -6.15% from its all-time high reached way back on February 19th. And yes, there is a bit of sarcasm there.

Check out Peter Lynch in his own words here:

Source: Peter Lynch CSPAN 1994 via YouTube

Because markets can go down, and many investors might not be comfortable or able to take considerable downside risk, we have our core strategies that aim to hedge or buffer the downside.

If you already have downside protection, should you worry as much about market declines that are part of the normal course of investing? There is always a reason to worry in markets. Will the market get down to a -10% correction level or firm up here?

I’ll let you know when I know, but this is why we hedge

You see above the hypothetical profit and loss graph of our Buy and Hedge Classic strategy compared to the S&P 500 Index. The idea is that you give up some upside but have a hedge in place to take out a good amount of the downside.

We’ve got a whole page devoted to explaining the risks and benefits of the strategies https://zegainvestments.com/products/buy-and-hedge.

Back to Peter Lynch and the video from 1994.

He didn’t reference hedging at all and talked about corrections as opportunities to buy on weakness. He would probably have told you just be diversified. But I prefer, especially for investors who still need growth but are in the pre-retirement and retirement phases, to give up some upside in markets so that they can hopefully rest a little easier with floors in their portfolios.

Protected growth.

As far as this current retracement, but not a correction thus far, remember over the long run markets have moved higher. Through wars, different presidents, financial crisis, pandemics and whatever else. I like to be an optimist!

But times like this are exactly why we hedge!