Ten Green Gambles for 2010: Q3 Update
To my surprise, the market came back in the 3rd Quarter, and my portfolio of put options designed to hedge a market decline is predictably down. However, my benchmark (a put against the Dow Jones Industrials has performed even worse than my picks.)
The chart above shows the performance of this hedging portfolio over the nine months since it was published.
Overall, the original portfolio is down 73% for the first 3 quarters. Also shown in the graph below is "Portfolio 2" which is what would have happened to your money if read the second update, and agreed with my suggestion that "if you want to maintain your hedge, it makes sense to add to it now with some more puts on some of the higher-flying travel and transport stocks, such as Starwood Hotels (HOT), Southwest Airlines (LUV) and JB Hunt (JBHT) at strike prices closer to the current stock price."
Portfolio 2 is only down 70% so far this year, since my short-term timing on that was good. (Unlike my overall timing in calling for a likely a market decline.)
Picking Hedging Strategies
Like my last performance update for my Ten Clean Energy Stocks for 2010, I don't expect this article to draw in a bunch of readers who are impressed by my stock picking abilities or performance.
Although both of these portfolios have beaten their benchmarks so far this year, they are also both down, which is what most investors (as opposed to money mangers) care about. Hedging strategies based on equity puts, like this one, have the advantage that the cost is capped in the event of a strong bull market, but they have the disadvantage that they lose money when markets are flat. In the accounts I manage, I choose the hedging strategy based on the level of options and margin allowed in the account. Put-based hedges are the best strategy available in retirement accounts such as IRAs, so that is the one I use for IRAs. In accounts with full option privileges, I use a mix of short call spreads and puts, a strategy which can cost more in the case of a upward trending market, but is more likely to break even in a flat market.
In retrospect, the best choice would have been to not hedge at all this year. However, if we could make our investment decisions after the fact, we'd never need to hedge at all.
DISCLOSURE: Short LUV, HOT, JBHT.