Some financial advisors/investment advisors say we are “investing for the long run.” They are quick to present studies showing that over the long run, investors will average 8% or whatever. In general, those are true statements, but most investors don’t have the 40 or 50 years those studies were designed for. Furthermore, when the hypothetical period of time begins can have a major influence on the average return. Take for example January 1, 2000 through December 31, 2015. The annualized return for the S&P 500 over that timeframe was just over 2.3%, had you reinvested the dividends it would’ve been just over 4.25% (source: https://dqydj.com/sp-500-return-calculator/). This is before any fees, trading commissions, or taxes owed!
We are now in the longest running bull market in history. Many of you can’t help but ask your financial advisor or your friend who is a financial advisor, “When will it come to an end?” Let me spare you the suspense – your financial advisor has no idea how long the bull market will last. To ask only puts him/her in a position to have to come up with some answer that they believe sounds intelligent. Or they will quote their firm’s chief economist, or some other economist they recently watched on TV. No one ever knows the answer to this question. But I do know this: we are eventually going to have a recession and the accompanying bear market will be painful.
And when the inevitable bear market comes and you go to your advisor who may have told you to use a buy-and-hold strategy, and you ask why your portfolio is down by some amount that you consider unacceptable, he may simply shrug it off and say something like, “I am sorry, but we can’t predict the markets. If you sit tight it will come back eventually.” This “advice” might be reasonable if you are 30 years old, but not if you are 60.
I’ll probably get some angry emails as a result of the next (or perhaps the previous) few sentences, but you need to know this: a buy and hold investment strategy is lazy. If your advisor continually preaches about the wisdom of buying and holding, find a new advisor. At the very least, have her cut her fee dramatically. What are you paying for?
There are lots of ways to hedge a portfolio. But first, decide how much of a loss you can stomach, make sure your advisor knows this number. Then sit with her and discuss what strategies make sense for you that will mitigate your losses. If you are managing your own money, use a friend as a sounding board to determine if you’ve thought things through.
To be clear, hedging doesn’t necessarily mean completely removing risk or preventing any losses. If you invest, you run risk. But if you don’t have a plan of action to lessen risk, you are simply leaving your investment results to fate. To summarize, the question you should ask your advisor shouldn’t be “When is the next bear market coming?” The better question is “What are you doing to hedge my portfolio?”
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