Hi I'm Jimmy in this video I'm
going to walk through some different
ways we could protect our portfolio
if we believe a stock market crash
is likely to happen now
there are a few different ways to
hedge a stock portfolio
and the one we choose or the
combination we choose is likely
to be based on a couple of different
things.
First our risk tolerance
and then our confidence or the
likelihood of a stock market
crash in the near future.
OK so the first very real
possibility is not the hedge at all.
Let's imagine that we have a
portfolio that were dollar cost
averaging in and dollar cost
averaging is when we buy a given
dollar amount the same dollar amount
at different time periods.
So let's say every month or every
quarter we invest the same amount.
Well this strategy
alone is a way of hedging
in its own right because if the
stock market falls well you'll just
buy more shares at a cheaper price.
So if that's the case we might not
need to hedge at all but let's say
we want to be a bit more strategic
than that. What can we do.
So I'm going to walk through a
couple of choices and beyond
just mentioning the strategy
I think it makes more sense to
look at how each of these would have
performed in actual stock market
crashes.
That way we can determine which
one will help us most in our
portfolio.
So let's start with adding defensive
holdings to our portfolio.
Now oftentimes this can mean adding
holdings that are typically thought
to do well in down markets defensive
industries like utilities health
care or consumer staples
are believed to do well in a down
market.
Bonds are often considered quite
defensive as well.
So how about we start
by looking at both the Great
Recession and the tech bubble
to see how each of these groups
performed in those time
periods and then we'll jump on to
other portfolio hedging ideas.
So this is what the S&P 500 did
in the early 2000s when the tech
bubble happened.
And as we could see this is a high.
And this is the low.
So how about we switch up this chart
to just start at the very highest
point and end at the lowest point.
Now this is what that chart looks
like. Now you may notice that I have
this chart scaled starting
with 100 value and you
may notice that the S&P is down here
at the bottom at fifty two.
Well that's because the S&P during
this time period was down about 48
percent. So 100 minus 48.
You end up with 52 value.
OK. Now let's start with some
comparisons.
So this is consumer staples
and as we could see consumer staples
did significantly better than
the S&P 500 did the S&P
500 was down about 48 percent.
Consumer staples were down like 3
percent. Now all these numbers are
in price returns meaning that
they don't account for dividends.
So the S&P was only down
about 46 percent if we assumed
that all dividends were reinvested
back into the index and the consumer
staples.
That's for this I use the ETF
X LP and that was
it represents the consumer staples
ETF and they were only
down about a half a percent if
you accounted for dividends.
Okay now switching over to health
care so we can see that health
care did in fact beat the S&P 500
although it wasn't as good as
consumer staples when accounting for
dividends being reinvested.
Well XLV that's the health care ETF.
They were down about 18 percent
while the S&P 500 was down about 46
percent.
So they did good but not as good as
consumer staples.
OK moving on now we jump over exhale
you which is the utilities ETF
and XLU was down about 26
percent.
Yes it was better than the S&P 500
but not as good as the other two
each. Yes.
Now I should point out when we look
at this chart we can see a huge
difference between the two lines.
And one of the primary reasons for
that is that utilities tend
to be good dividend payers
and we can't forget that this is a
price chart.
So they were really down about 33
percent on the price chart.
But when we consider the dividend
perspective they were only down
about 26 percent.
OK on onto our last category
investment grade bonds.
Now I actually couldn't find an
investment grade bond ETF
that was trading back at this time
but today there is LQD.
And interestingly the index
that LQD tracks which is called the
ie box liquid investment
grade index.
Well they did have data on their
performance for this time period.
So that's what I ended up using.
Now if we fast forward to the Great
Recession. Well this is the S&P 500
from the top in October of 2007
to the bottom in March of 2009.
So when we compare this to the
consumer staples ETF Well once
again the consumer staples ETF beat
the S&P 500 and the S&P
500 was down about fifty five
percent and XLP was down just
about 28 percent.
When we switch over to health care
what we can see that health care did
outperform the S&P which would
in theory mean that it would work
as a hedge for our investment
portfolio.
Now XLV was still down
a total of about 37
percent during this time period.
So yeah sure it would work as
a hedge but it wasn't really a great
hedge. Now when we switch over to
utilities Well we can see a very
similar story.
They beat the S&P.
So that's good.
But as an investment hedge I'm not.
Sure it worked all that great
because this exhale you
Well it was still down about 41
percent. So sure it was a
diversified.
But it wasn't a great one.
And this brings us to investment
grade bonds now.
This time LQD was live.
LQD is an investment grade bond ETF
so it looks like they were
down about 11 percent during this
time period.
And that is true on a price basis
but since they pay pretty good
dividends on a total return basis
they were down about 4 percent.
Now to me that's much better
if somebody had told us that we
could invest at the top of the
market and the market would be down
more than 50 percent and we
would be only down about 4 percent.
Personally I'd be fine with that
but can we do better.
So one popular portfolio hedging
technique is to use gold but
does gold actually work as a hedge.
Well this is gold during the tech
bubble of the early 2000s.
And yes gold held up quite
nicely up about 13 percent
as the S&P fell just short
of 50 percent.
When we switch over to the great
recession once again
gold did excellent up about 25
percent while the S&P 500
was down more than 50 percent.
Now I do want to point out one fact
about gold as a hedge.
Yes it tends to be a very good hedge
but not for many of the reasons that
we often think it is.
It's not really tied to the stock
market at all.
Instead it's really tied to
currencies specifically
the US dollar.
So this is gold versus the US
dollar during the Great Recession
and as we could see they often
move opposite of each other when the
dollar goes up gold goes down and
vice versa.
Well why does this work as a hedge
then. Well during recessions the
dollar tends to weaken which is
usually a good thing for gold.
Now this isn't perfect
every time. It doesn't always happen
that way. In fact the International
Monetary Fund estimates that about
half of the movement in gold is
explained by movements in the US
dollar. So it's not exact
but I just wanted to bring this out
as a point for something else to
consider.
The real main point here is that yes
gold tends to work as a hedge.
Okay. Now onto our final hedge now
one is using stock options.
So there are a ton of different ways
to use stock options as an
investment hedge.
Now options can be a bit more
advanced and we really need to be
sure that we're comfortable using
stock options before we go ahead and
put our hard earned money to work to
very good stock option strategies
are called protective puts and
covered calls.
Now we actually have more in-depth
videos on each of these topics
and these are really some of their
simpler of the option investment
hedging strategies.
So if you're interested in learning
more about either one of those have
links in the description below for
those two videos.
So to keep this video from getting
too long I'm just going to very
briefly summarize these two
investment hedging strategies
if you're interested in seeing more
options related videos.
Let me know in the comments below
because I'm actually a huge fan of
options and it's something I studied
a lot of and I really like them.
So if you want to see more of those
let me know in the comments but
basically covered calls
are good. If you want to grind out
some additional income for a stock
or an ETF that you already own
while protective puts are good
because you don't have to own the
stock of the ETF and you make money
if that falls.
But they can get a bit expensive
if you want to buy them for long
periods of time.
So my opinion is the smartest thing
to do is to keep a diversified
portfolio adding some gold
could make sense as a hedge and
adding some bonds would also
probably help the portfolio a lot.
Now I used corporate bonds in our
example because they have
the added perk of
paying out semiannual
usually semiannual income
payments or dividend payments.
Similar concept and
this could be a good thing for our
overall portfolio.
Now if we wanted to add some options
to the whole mix well that could be
a bonus if we know what we're doing
with them. So what do you think.
How would you go about protecting
your portfolio if the stock market
crashes.
Would you protect it at all.
There's lots of choices and
there's many different ways to do it
based on the way our portfolio is
currently set up.
Let me know what you would do in the
comments below I'm very curious to
hear everybody's opinion on this.
Thank you for stick with me all the
way to the end of the video.
They haven't done so yet.
Please hit the subscribe button hit
the thumbs up are seeing the next
video. Thanks.