The Pros use a variety of hedging techniques to protect their
portfolios in the event of a broad market sell-off, and thanks to the
proliferation of exchange-traded funds (ETFs), it is now easier than
ever for retail investors to do the same.
My Hedging Strategy
Step-by-Step:
Rule 1: If
you have enough cash on hand, buy "SH" - SPDRs Inverse S&P-500 Index -
because, this index is well diversified with plenty of liquidity. If
your cash on hand is low, only then buy "SDS" - ULTRA Inverse
S&P-500 Index, however, do not exceed 25-40% of your current
holdings.
Rule
2: Sell 1/2 of all positions first before buying
inverse ETFs
Rule 3: Always buy inverse ETFs
less then your portfolio value (about 50-80%), because you are buying protection and not trying to
make a profit!
Rule 4: Buy inverse ETFs for
portfolio protection in 2-3 increments while the market is in a clear
downtrend. Trading below the 20-day moving average or trading through
a support level is a good indicator of a potential downtrend.
Rule 5: Sell your protection in
increments as the market trend reverses. It's not necessary to add to
your long positions, because you still have positions that enjoy gains
from a potential market rally to the upside.
Rule 6: Try to be in the market
(invested) at all times. When going through a market correction, your
are not looking for a profit, just protection; Plus, always watch the
trend - charts don't lie, fundamentals may fool you. And remember:
"you need to know, what you're going to do next" and when in doubt,
stay on the sideline.
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