portfolio insurance

You wouldn't drive your car without spending (annually) 1% of its worth on insurance in case of a crash; why do you run your portfolio without insurance?

During precarious times such as these, buying a little portfolio insurance makes good sense. If you don't need your auto insurance one year, are you upset that you didn't need to file a claim and hence wasted the premiums? No! of course not. Even if your premium is completely lost, it accomplished the objective you assigned it to do -- to protect you in case of a crash.

Portfolio insurance is a strategy of hedging a stock portfolio against adverse price movements (that is, risk) in the market by a) buying put options on a market index or b) selling short a market index. Talk to your broker about this objective, to see if he will allow options or shorting in your account; if not, you may need to open an account elsewhere to accomplish this objective. Planning ahead is always wise!

A perfect hedge reduces your risk to nothing (except for the cost of the hedge), just as the perfect car insurance covers everything. Usually you can save money on your premiums by building in a deductible where you suffer the first 2% of the damage and the insurance gets the rest. So also with portfolio insurance: your monthly premiums will be lower if you buy to reduce but not eliminate all of your risk.

If you don't feel comfortable trading options or shorting stock, talk to your financial planner about how you can insure your portfolio from loss in case of a market crash. Especially if your portfolio is vital to your retirement, you'll sleep more soundly because you did.