Risk is a part of life. Everyone has to deal with it. Some people handle it better than others and they may be the folks who venture into the stock market. Even so, I wonder how much they know about mitigating the risks of investing in stocks.
I have touched upon this subject several times in the past and refer you to my essay on "Asset Allocation", dated 02/07/03. Two weeks ago, I wrote about an article which appeared in USA TODAY which said that the way to deal with stock market risk is to "Stay the course and just hang on." This guidance was reinforced by evidence that the likelihood of making money in stocks increases with the holding period. Although this claim is true, it doesn't mean that buy and hold is the best way to manage a portfolio.
I wrote about portfolio management last week and noted the importance of selecting good stocks and of using exit strategies. My essays of 11/12/04 and 04/21/06 addressed the subjects of "Deploying Funds" and "Using the Right Stop Prices." Although these essays are helpful in mitigating normal business risk, they may not be sufficient to cope with abnormal risk, i.e., catastrophic terrorist attacks. The world changed with the tragic events of September 11, 2001, and knowing how to cope with the ongoing threat of catastrophic loss needs to be considered.
For three years after the 9/11 attacks, I maintained substantial hedge positions in my personal portfolio. Of course they cost me money, but I thought they were worth it. After the Presidential election of 2004, I felt some relief that the threat of a terrorist attack in this country had lessened and so I reduced my hedge positions. Now I'm not as comfortable as I was before the plot to blow up 10 jets leaving from Heathrow Airport was reported on August 10th. As I wrote on October 5, 2001, we are being told to go on with our normal daily lives, but the world has changed. Ironically, it has made buy and hold strategies riskier than ever.
This may sound strange, but we are being told that it's not a matter of if there will be another terrorist attack on U.S. soil, but when. If this is true, then the longer one holds an asset, the more likely it is subject to a catastrophic event. Therefore, one must protect his or her assets against it. The best way I know of doing this is through the use of Put options. Put options, however, are expensive. So I have turned to the use of option Collars, which are combinations of option Calls and Puts. I have written about option Collars on many previous occasions, but refer you specifically to my overview of 05/28/04, and strategy section of the VectorVest Views on 02/18/00. Other selections on using option Collars may be found by using the "Search Views" function in VectorVest Views.
As a final note, I must say that no one should trade options unless they know what they are doing. If you don't understand options, please take the time to learn what they are all about. Options can play a major role in helping you mitigate Risk, increase Patience and improve Reward. To view the VectorVest tutorial on Options,
Click here, or for more information on Option Tools
Click here.
AVERAGE ANNUALIZED RETURN OF 134%.
If you're serious about making real money in the stock market, you'll want to follow our Strategy of the Week tutorials. They appear in written form in the "Strategy of the Week" section and in video at the VectorVest University. They provide the single best way to learn how to find and use the best strategies in VectorVest. Over the last 52 weeks, these strategies produced an Average Annualized Return of 134%.
