Over the last few sessions, the S&P 500 (^GSPC) dropped more that 3%, causing some panic among investors who are wondering whether this is the beginning of a bear market.
Conversing with fellow investors over the last few days, I often discouraged an extremist approach to investments, i.e. holding uncompromising views of a security’s rise or fall. Instead, I promote a more evolved approach that takes into account all the circumstances (including risks), and then decides whether the security truly represents an investment-worthy candidate. In doing so, an investor prepares himself for different outcomes, which helps him manage his risk more effectively.
Not only is it important to generate gains but also to protect them. In view of these fears, I decided to pen this piece to discuss a few ways that would help investors cope with market uncertainties. While here are numerous ways to approach this, some of the most common include buying protection in form of put options or inverse exchange traded fund (ETF).
The notion of purchasing protection is usually triggered by fear of one or more negative developments over the short term that will adversely impact your portfolio. To begin with, it is important to recognize the fear for which you are considering the purchase of protection: Are you fearful of a short-term volatility in the market? Are you expecting a correction in a stock’s price?
Stock related fears
This is perhaps the greatest fear of a retail investor, who often
Advisors and investors would do well to pay as much attention to the expected volatility of any portfolio or investment as they do to anticipated returns. Moreover, all things being equal, a new investment should only be added to a portfolio when it either reduces the expected risk for a targeted level of returns, or when it boosts expected portfolio returns without adding additional risk, as measured by the expected standard deviation of those returns. Lesson 2: Don’t assume bonds or international stocks offer adequate portfolio diversification. As the world’s financial markets become more closely correlated, bonds and foreign stocks may not provide adequate portfolio diversification. Instead, advisors may want to recommend that suitable investors add modest exposure to nontraditional investments such as hedge funds, private equity and real assets. Such exposure may bolster portfolio returns, while reducing overall risk, depending on how it is structured. Lesson 3: Be disciplined in adhering to asset allocation targets. The long-term benefits of portfolio diversification will only be realized if investors are disciplined in adhering to asset allocation guidelines. For this reason, it is recommended that advisors regularly revisit portfolio allocations and rebalance
Mr. Lee and the other executives expect to generate a higher profit from hedging since they have majority of their personal wealth invested into the firm. The focus of any hedging program should always be to minimize the firm’s risk of loss, but that does not mean the they will
magnitude of these risks, this paper advocates for a more proactive solution. Active investing in
Cernauskas, D., & Tarantino, A. (2011). Essentials of Risk Management in Finance. Hoboken: John Wiley & Sons, Inc.
If you are a new investor who is interested in investment history or how to make investments, purchase this book by Burton G. Malkiel. This book is ideal for any experienced investor who wants to brush up on their knowledge of investment techniques and theories also. There are not many books that have been written about investing. A Random Walk Down Wall Street is broken down into four parts which include; Stocks and Their Value, How the Pros Play the Biggest Game in Town, The New Investment Technology and A Practical Guide for Random Walkers and Other Investors. In total, there are fifteen chapters that cover a lot of key points that many will find interesting and informative.
In regards to investing in stocks, bonds, currencies, or other investment products, it has always been a normal emotion to be happy when a stock price rose and upset when a stock price fell. Yet for Warren Buffet and his team at Berkshire they welcome these declining prices because of the opportunities it brings. According to Warren Buffet, a true investor would be buying stocks and businesses for their entire life, and “with these intentions, declining prices for businesses benefit us, and rising prices hurt us.” Understanding that the investor is going to be a buyer for eternity an investor should
This document is authorized for use only by Yen Ting Chen in FInancial Markets and Institutions taught by Nawal Ahmed Boston University from September 2014 to December 2014.
The learning objectives for students in this course are: (l) improve your understanding of financial securities and markets, (2) develop the ability to analyze investment companies, common stocks, and bonds for investment decisions, (3) understand how options are
“…anointing winners and losers on the basis of 12 months’ worth of performance is silly in the context of portfolios that are being managed with incredibly long time horizons.” — David F. Swensen, Chief Investment Officer, Yale University1
Established in January 1999, Pine Street Capital (PSC) was a market-neutral hedge fund that specialized in the technology field, facing market risk and trying to decide whether and which way to use in order to hedge equity market risk. They choose technology sector because the partners of PSC felt that they have enough ability to evaluate this sector and specially be good at picking out-performing stock. Short-selling of NASDAQ and options hedging strategy are the two major hedging choices for PSC. Either strategy has its own advantages in different economic periods and conditions. The fund has just through one of the most volatile periods in NASDAQ 's history, and it was trying to decide whether it should continue its risk management
Further, our strategy involved paying attention to current events and attempting to use them to generate a return. For example, Horizon Pharmaceuticals’ stock price took a nosedive after an October 19th New York Times article suggested that Horizon was attempting to thwart Express Scripts’ attempts to lower the price of prescription drugs. The decision was made to buy 100 shares of stock in Horizon when its price spiraled down to a measly $14.62 per share, as we expected Horizon would do something to stop the bleeding, and historically has been a pretty volatile stock. Horizon came back with a scorching rebuttal in an open letter later that day, spiking its stock price more than 30% on October 23rd, and by October 28th, this move landed us our greatest return of any stock that we purchased and held until the end of the period: 18% (see appendix).
Many Americans are taught that investing is the avenue to wealth and financial independence in retirement. However, the questions: where should I invest, how much should I invest, or is my money safe precludes some from entering the investment arena. While this paper is not meant to answer those question, the first half will compare the daily performance of three well known stocks: Microsoft, Apple and Staples based on the probability of a daily loss and the probability of closing above the mean value, the second half will explore the probability of winning a game of chance.
2. If the NASDAQ index falls, an increase in the value of the puts may approximate the loss in the portfolio’s value. The protective put limits the portfolio’s downside
During this time period, prices for the stocks increase substantially, accordingly reducing risk premium demanded by the traders. Also, shares should amount from 30 to 55 percent of the entire investment portfolio to optimize the investor’s expected profitability. Proximity of the evaluated results to the reality reveals excellence of the myopic loss aversion model (Siegel and Thaler, 1997).