When you add some portfolio protection as a defensive measure, whether it is utilizing inverse ETF’s, options or straight out shorting stocks it certainly does not feel good when the market is rising. The result is likely a drag on performance, especially on a day like Friday when the SPX 500 moves higher by more than 1.5%. Everything was moving higher except those bearish bets. It’s on these days we scratch our heads and wonder if these moves were needed or not.
But we have to remember the purpose for keeping protection in our portfolios. The insurance policy is not placed in order to win, rather we want to reduce/dampen volatility. Does it hurt when the market is rising? Sure it does, and we often feel regret after the fact. It feels even worse when our bullish plays do not perform well, either. That is a double negative. However, the time line for effective insurance policies such as these is not one day, one week, even one month.
The goal here is to look at the bigger picture and realize that in a bear market such as this we will be sheltered and insulated somewhat by the negative shocks that will eventually come out of nowhere. There is not ‘all clear’ in this market, and having the protection in place will serve us well when the surprises come out.
