8 Minute Read

Tackle Today: Portfolio Protection Principles

July 1, 2021

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When it Matters

Traders,

Yesterday we looked at the first scenario where portfolio protection was unnecessary. Today we’re tackling the second.

Suppose you have a portfolio of long-term stock/ETF positions. Your time horizon is decades, and you have the utmost confidence that the advance is permanent and the declines temporary. Furthermore, you’re willing to sit tight through any drawdowns without selling. In a situation like this, why worry about portfolio protection?

Historically, the market falls over 10% once a year on average and 30+% once every five years or so. BUT THEN IT RECOVERS. Time heals all wounds. It bails you out of every sticky situation. At least, it has in the past if you’ve owned a diversified portfolio. And I suspect it will continue to do so in the future.

This was my approach during last year’s pandemic. Even though the S&P 500 fell 35% and the Russell 2000 fell 44%, I didn’t lose a penny. Do you know why?

Because I didn’t sell.

Patience and discipline can be just as effective sources of portfolio protection as put options.


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