There are two classes of investors: those who hire professionals to manage their money, and those who manage their own portfolios.
I'm intentionally omitting short-term traders from this discussion.
Self-directed investors make their own buy/hold/sell decisions. They may use futures or options for hedging, but all decisions are made on their own. Some devote many hours to studying markets or graphs. Some read about and study investing and/or trading techniques.
I'm a big fan of investors who manage their own portfolios. But it must be recognized that not everyone has the time or skills required to do a good job. And when your financial future depends on those abilities, it's important to hire a good manager. Hiring yourself is best, but if you cannot do a good job, it's okay to hire others.
Financial advisors, financial planners, stockbrokers*, or anyone else who gets paid a fee or commission to provide investment advice to the general public has a fiduciary responsibility to make every effort to do a good job. IMHO, far too many fail to do that. *See comments
I base this opinion on the type of advice that one hears on TV or reads in the newspapers. Financial professionals are frequently interviewed and their opinions are 'out there' for people to see and hear.
The most common advice is the same as one would offer to the 'prudent investor.' For example: diversify your holdings; allocate your assets among different investment classes; buy and hold; don't panic when the market falls; buy mutual funds and rely on professional money managers; etc.
There's nothing inherently wrong with most of that advice, with the exception of buying traditional mutual funds. Most of those funds cannot outperform the market averages, but that doesn't prevent them from charging fees (and sometimes sales commissions, called loads) despite their underperformance. If mutual funds are your cup of tea, consider investing in index funds that charge very small management fees.
Don't forget hedge funds. They had years of spectacular success, only to be followed by this year's disaster. The managers of hedge funds charge 2% annual fee plus 20% of any profits earned. You take the risk, they take a good portion of the reward. Not a good deal, IMHO.
Many of you can do better
As recent events have demonstrated, traditional investment advice is not sufficient. A necessary ingredient to long-term successful investing is risk management. No one cares about such ideas when the markets are rising. All investors believe they are intelligent for picking stocks that continue to increase in value. The truth is, it's easy to make money in a bull market.
But, bear markets are inevitable. When portfolio values fall, investors become very upset, not knowing where to turn or what to do.
To me, the solution is to constantly to be aware of risk and to hedge (reduce the risk of owning) that risk – even when markets are rising. The amount of money that you fail to make by hedging can be dwarfed by the amount saved when the market tumbles. Obviously this discussion is currently relevant – just after the October Massacre of 2008, and during who knows what for November.
Options are a simple hedging tool. The basics are not complicated and can be readily understood by almost everyone. All of my favorite, basic strategies are easy to understand, and millions of investors are capable of using options to hedge the risk of owning a stock market portfolio. A thorough description of my six favorite strategies is available in The Rookie's Guide to Options. You can download a free e-book sampler.
Options are not suitable for everyone, so be certain you understand the risks and rewards of using them. But if you adopt conservative strategies and have the time and willingness to learn something new, you can easily afford the protection that hedging with options offers. Some strategies provide minimal protection, while others can protect your entire portfolio. Some provide limited (but significant) potential profits while others give you the opportunity for unlimited profits.
Are options for you?