The word protection comes from the Latin pro meaning "in front of" and tegree, meaning "to cover". For many investors, portfolio protection refers to the range of asset allocation strategies, investment instruments and mentalities that we can use to define all or a portion or our assets against loss. Psychology and good old fear and greed are what drive us to protect ourselves against loss. Not only is it important to understand your personal psychological makeup, but you also need to be aware of naturally occurring fluctuations in your (and others) level of fear and greed based on market cycles.
During the early and mid stages of bull market, investor interest in portfolio protection ranges from moderate to low. As the bull market ages and moves into its more advance, mature and perhaps speculative state, investor interest in portfolio protection tends to become more defined by investor personality and self-awareness. Cautious investors begin to look for ways to protect the gains they have achieved in the rising market. Less cautious, less self-aware investors tend to adopt the "What? Me worry?" approach of Mad magazines 'Alfred E. Neuman.
As asset prices top out and begin to move downward, risk moves to the forefront. The cautiously wise investor maintains and perhaps adds to his or her protection. Overly optimistic and aggressive investors hope that the sell off is only temporary and that prices will return to new highs. When the bear market of falling asset prices picks up momentum in its mid stages, more and more investors begin to think about and search for various kinds of portfolio protection. In the late stages of a bear market, interest in portfolio protection remains quite high, reflecting elevated levels of investor frustration, disenchantment, disillusion and despair.
In recent years, increasing numbers of strategies have been developed to help investors protect their portfolios. Over the years, the idea of protecting portfolios has evolved from diversification alone to asset allocation.
Before exploring some main avenues of portfolio protection, it is wise to keep a couple of things in mind. First, some of the best, yet most often overlooked means of portfolio protection involve having an appropriate degree of diversification. Second, a written statement of investment objectives can act as a focal point during volatile periods to keep us from tossing out the baby with the bath water.
Contributed by:
David M. Darst author of: "The
Little Book That Saves Your Assets: What the Rich Do to Stay Wealthy
in Up and Down Market".
