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Anonymous

18 Apr 2019

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General Investing

What is an appropriate portfolio allocation for hedging against a downturn?

I was talking to some friends about this, and they say that if your capital is too small, it wouldn't make much sense to try to hedge

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Hariz Arthur Maloy

25 Feb 2019

Independent Financial Advisor at Promiseland Independent

You can choose to hedge via asset allocation or by using derivatives.

If via allocation, I'll switch some of my equity holdings to defensive industries like Healthcare, Vice, and Consumer Staples, exit from emerging markets, allocate more of my portfolio to fixed income and cash, maybe load up on some gold as well.

However, I would like to add a quote from Peter Lynch.

β€œFar more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves.” – Peter Lynch

So it's important to just remain invested and buy more after a correction.

Mostly institutional investors will need hedging, as selling might not be practical or more costly to perform, or they are obliged/restricted to certain holdings rules.

For most retail investors do not need hedging, as their portfolio are relatively small or in fairly liquid instruments. Reducing exposure is the easiest. Eg, Convert part of your portfolio to short-term nearcash instruments like Tbill or SSB? There will be a cost for 'hedging', that is opportunity cost (potential higher returns). Some might convert portfolio into more 'defensive' sectors.

If u really want to 'hedge', It depends what is your portfolio or how sophisticated investor are u. Derivatives like options are very useful if u know how to use. Or buy into inverse ETF.

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