Hedges Are More Important Than Ever

With the stock market rally post-March taking stocks recently to record highs, many investors with naked (unhinged) portfolios who stuck with it and did not sell on the way down (or bought on the way down) will laugh at the premise of this article. That said, I'm going to now touch on why I think now is the time for investors to consider hedges, more than ever.

When one takes a look at the performance of the TSX, for example, since March lows, what can often be lost in the discussion is how well gold companies have performed post-volatility. As other sectors declined (and many, such as energy, continue to lag), a significant amount of slack has been picked up by gold companies. Those without gold hedges, or a portfolio inclusive of precious metals companies, missed out on a significant portion of the rally. This is one example of what I mean.

Hedges, such as put options in other trading strategies tied to options, can help smooth out returns overtime. This means in good times, one may only gain 80% of the total upside of a given stock (as an example), but may also only lose 60% of the total loss one may otherwise expect - a worthwhile trade for some.

With more volatility likely on the horizon, I encourage investors to consider such a strategy moving forward.

Invest wisely, my friends.