There’s Always a Reason to Sell So Just Be Hedged!
By Derek Moore
Several advisors and clients have reached out asking, “should I go to cash”?
Today the reasons are:
- Nvidia Jensen Huang investigation
- AI Slowdown Due to Democrats Winning Midterm elections
- Fed Potentially Hiking Rates More
Next week it will be some other reason.
If you look at the graph going all the way back to 2009 any number of “reasons to sell” are listed. It’s natural to worry about markets.
As I always say, if you are going to need the money in the next year, you should have already been talking to your advisor! But this is why you have a plan in place to think about what you are trying to accomplish.
Impact of Missing the “Best Days” Each Year
Since 1950, missing just the single best day of each year brings down the S&P 500 Index annualized return from +8.4% to only +4.8%.
Miss the 5 best days each year and the return is negative -4.3%. You might say, well what if I missed the worst days each year. Of course, if you were Nostradamus and could miss “only” the worst days, great! But the best and worst days tend to cluster around one another.
More often investors sell at the wrong times and stay out of markets only to miss the rebound days.
We think it’s preferable to stay fully invested but be hedged so you can attempt to remove market timing decisions. The hedging is aimed to help you feel a little more at ease.
Volatility In Stocks Intra Year vs Year End Annual Returns
Not pictured, but 1987 which had a peak to trough drawdown of around -33%.
What many people forget is the S&P 500 Index wound up with a full year gain of roughly +2%. But investors had to experience, or suffer, the drawdown and volatility. That is something not many were able to do or out of self-preservation, sold out and waiting until the coast cleared missing out any potential recovery.
And who would blame them in the moment, which is why it's so important to attempt to build portfolios that don’t require one to make emotional decisions in the middle of a market event.
Just Be Hedged
Source: ZEGA Investments
Because markets can be volatile, and because most investors need growth even into retirement to keep up with the cost of inflation, being in markets is important.
This is why since the start ZEGA has been preaching owning the market but having strategies that seek to provide downside protection with the opportunity to participate in the upside of markets.
Ask Yourself:
- Would being hedged help to stay in markets during volatile periods?
- Would being hedged help to remove emotion and uneasiness with markets?
- Would being hedged pre-retirement and in retirement meet my objectives?
If you could somehow pick when markets are likely to fall, the real challenge is when to get back in?
I remember talking with investors post 2008-09 for the next 4-6 years who were still waiting to get back in sitting in cash.
Going back to early in my career, I remember speaking with people in 1994 when the memory of 1987 was still fresh, waiting it out until the coast was clear. Certain another Black Monday was right around the corner.
If you want to talk further about where hedging strategies might align with your goals, don’t hesitate to reach out to a ZEGA Investments team member.