Have you heard the hysteria? “The market’s back! At all time highs! Buy and hold WORKS!”
But you’re smarter than that. You remember the ups and downs (see charts 1 & 2). Factoring inflation, the S&P isn’t at an all time high. The NASDAQ isn’t anywhere close to its high reached 13 years ago.
If you bought and held, depending when and which index was purchased, you could still be significantly in the red. Since 2000, there hasn’t been a 5 year period without at least a 43% drop in an index.
The intelligent approach is to buy equities and hedge against catastrophic losses. One method is to use Protective Puts. This strategy allows reaping of unlimited upward moves in a stock, but limits loss to the premium cost of the option.
Let your gains run but cap your losses.
Applying this strategy over the past 20 years could have allowed an investor to make significant money during the uptrends (which varied 87% to 460%), yet only suffer minimal losses during the downtrends (which varied -43% to -74%).
You say that no one’s smart enough to sell at the top of a market? One person comes to mind. Ever hear of Mark Cuban? In 1999 he sold broadcast.com to Yahoo for $5.9 billion (in Yahoo stock).
You may never be as rich as Cuban, but you also don’t have to be as clever as him to be a successful investor. Watch the indices, participate in the uptrends, hedge against a major loss.
