It’s Time to Insure Your Portfolio

In times of stress and anxiety we all need to feel a bit more secure. In financial markets this is certainly not a time to be complacent. The Federal Reserve is knocking on the door and is threatening to raise interest rates sharply. This is the only effective tool they have to blunt higher inflation, and while we would love to have the best of both worlds (no inflation, stock markets rising forever), there are consequences if inflation is not reined in.

Volatility is only going to rise as uncertainties abound. Why is that? The markets hate uncertainty, and while we can agree the Fed’s monetary policy is extremely hawkish, who really knows how far they will go to combat higher prices. There is no secret formula but rate hikes will do the trick. It is just difficult for the committee to know when it is time to stop raising them.

Rising volatility is going to have a stinging affect on stocks. Most investors and traders do not like wide moves up and down on a daily basis. When the VIX (volatility index) moved up and over 30% and stayed there for awhile it became quite uncomfortable. In fact, there were several large selloffs with a ‘shoot first, ask questions later’ mentality. But as we often see, panic is never a way to make money.

What can you do to defend against volatility? Simply add some protection. We can do this in several ways, the easiest and most efficient is buying index puts. The goal here is not to cash in and make loads of money – though that can certainly happen very quickly – rather we want to blunt the market volatility as much as possible.

Markets go down faster and more pain is felt on the way down than the joy you feel on the way up. Hence, fast moves down are a good way to lose your money and your mind, but if you had some protection working it might be a head spinner. My favorite put instruments include the (SPY) , (DIA) , (QQQ) and (IWM) . These are all liquid and will offer you great protection in times of need.