Investopedia presents a thorough examination of
hedging an investment, starting with this definition:
A position
undertaken by an investor that would eliminate the risk of an existing
position, or a position that eliminates all market risk from a portfolio. In
order to be a perfect hedge, a position would need to have a 100% inverse
correlation to the initial position. As such, the perfect hedge is rarely
found. See the full article:
Like many other do-it-yourself portfolio managers, I hedge by
diversifying my capital first among the following:
• Well-researched individual stocks. For examples, see:
• The no-load inverse mutual fund GRZZX. See:
• An MLP yielding double digits. See:
• Also, I own an ETF invested in stocks paying dividends. And:
• An ETF invested in U.S. Treasury bonds. And:
• An ETF invested in a portfolio of real-estate investment
trusts. And:
• A gold-miner ETF.
For ETF screens, you can
go to:
Finally:
• I don’t own stock options, though perhaps I should—but I
don’t know much about them. I do know Investopedia has an excellent explanation
of stock options:
“The advantage of options is that you aren't limited to making
a profit only when the market goes up. Because of the versatility of options,
you can also make money when the market goes down or even sideways.” Continuing
what Investopedia says:
Another function of options “is hedging. Think of this
as an insurance policy. Just as you insure your house or car, options can be
used to insure your investments against a downturn.”
For the full rundown on stock options, go to:
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