Personal Investor: Do-it-yourself portfolio hedges
There seems to be a lot of optimism in the markets right now – and that should make any investor nervous.
Big global money managers are making assumptions about where Donald Trump will steer the world’s biggest economy, while the U.S. president-elect continues to be ambiguous.
Evidence of the market jockeying taking place right now can be seen in the divergence among sectors and geographic regions. Where relative harmony is the norm, in the course of any day banks and health care stocks could be moving in one direction, while resource and consumer stocks move in another direction. The same divergence is taking place geographically – U.S. equities, Canadian equities and international equities are all over the map.
If big global money managers are wrong, it could mean scaling back on Ferrero Rochers at the company Christmas party. For those of us who invest for retirement, the stakes are much higher.
That’s why it’s important to ensure your portfolio is properly hedged. Too many investors look at portfolio management as a series of wagers on horses they bet will cross the finish line first. That’s where investing and wealth management become two very different things.
The objective of wealth management is to allow your portfolio to grow over the long term, while preserving the gains you’ve already made. Preserving those gains requires hedging. Your portfolio needs to function like one machine with many moving parts.
Any machine requires a qualified mechanic and that’s where an investment advisor can help build one that suits your needs.
There are several ways to create hedges, but the primary question to ask in any single investment should be: How can I limit losses if this one investment declines in value?
The basic hedging tools in a typical investment portfolio are asset allocation, diversification and – in some cases – options.
Watch the video above to see how they work.