Opinion: What’s an Investor to Do Now?

The October massacre of 2008 cost many investors (as opposed to short-term trades) dearly.  Those who held all the way down must decide whether to sell portions of their holdings when the market rallies, or hold – with the expectation (or more likely, a prayer) for a full recovery.

Professional advisors, who get paid regardless of how badly their stock picks perform, suggested that not panicking was a good idea when the decline began.  That idea didn't work too well.

The truth is professionals cannot consistently beat the markets and relying on the advice of others may make you feel good about about your decisions, but it's probably not going to do any good.  Do listen to advice and try to make decisions that suit you and your comfort zone.

I'm not going to offer any market prognostications.  Instead, I suggest that investors consider the idea of reducing risk and hedging portfolios.  After due consideration, you may decide that hedging is not for you, but it's foolish to blindly hold stocks with no consideration given to risk involved.


Alternatives

The easiest hedge is to simply sell part of your holdings.  Or you may decide to adopt an option strategy on a portion of your portfolio.  You'll lose less on a decline and earn less on a rally.  This method is not for everyone.

You may also adopt basic option strategies.  You have a choice between paying top dollar for insurance (option prices have receded a bit in recent days, but are still closer to historical highs than their average levels), or limiting upside potential by adopting a collar or covered call strategy.

The collar provides excellent protection against a further decline, but severely limits upside potential.  The covered call provides little protection if your stocks tumble, but does provide some profit potential on a rally.

Not an easy decision for most.  Insurance is costly and most people who held this long may be unable/unwilling to take large losses and refuse to consider hedging positions with options. 

Try to put your emotions aside and consider your tolerance for risk and your desire for profits and reach an unemotional decision.  No one buy you knows if holding is right or wrong, but you know just how much risk you an tolerate, and how secure your finacial situation is.

Your decision may not be suitable for others, but that's not your concern.  Take care of your needs.  The future is uncertain.

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