Keeping Your Portfolio Balanced Is A Wise Hedge

No one really knows which way the markets will move. So how do you survive market moves? You hedge your bets. That goes for both professionals and responsible investors.

Markets present opportunities for anyone to participate in owning or lending money to the producers of our goods and services. Producing goods and services is our collective livelihood. Their total value represents our wealth.

Aside from earning our own working income, we can expand our own wealth - our savings- by helping others through participating in the market. The market compensates us for the use of our money and for the increased value of the goods and services produced.

But the demand for goods and services changes for a variety of reasons and in complex ways. Changes in unemployment, interest rates, fads and fashion, technological capabilities, international worries and weather are examples that influence demand - and the demand for some goods and services versus others.

Anticipating what changes are ready to occur and how they'll affect the market is very difficult - or impossible. But the markets will change - quickly or slowly - and that creates opportunity to make money - big money - in the markets.

Professionals count on market moves - up or down - to make money. They may bet on 'up' but will hedge their bet by an offsetting bet on 'not up' or simply 'down'. They'll let their winnings grow but keep any losses small. They know that putting all their eggs in one basket (up or down) is a prescription for financial suicide.

The average investor doesn't have time to play every little market move. He takes a long term view to investing. He must last through the markets' bull and bear cycles - cycles whose beginnings and endings are known only in hindsight.

A wise investor watches the markets and is ready to make adjustments or set stop losses where he can. But he balances his portfolio somewhere between equity investments and income investments according to his investment horizon time, which depends on his age, as a hedge against sudden and prolonged market moves.

During bull markets his equity investments grow. In bear markets hopefully his equity doesn't lose too much or he stops out before excessive losses. But his income investments pay him money in either a bull or bear market. He might lose some gain in those bull markets for not having all his eggs in one basket - the equity part of his basket - but if the market goes south, he doesn't lose his whole basket of eggs.

Prepare you portfolio (basket) balance so market moves - unpredictable as they are - won't destroy it. And keep it balanced so it can still serve your needs.

Hedging means that maintaining wealth is as important as growing it.

at 1:14 AM
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