Reducing the Chance of Wakeups!
I remember when someone suggested we try white noise to help the baby sleep at night. She was about 5 weeks old at the time and was sleeping in her own crib next to our bed.
Babies are noisy sleepers. They make all sorts of noise at night. The white noise was as helpful to us as it was to her. It seemed to drown out everything.
Now we use it to help the next one sleep when we are staying with family. He’s an extremely light sleeper and it seems to help reduce the risk of him waking up because he heard someone walking around. It’s our little insurance to get a bit of extra sleep.
What is Hedging for Investing?
Hedging is like a white noise machine. It’s a form of insurance based on the types of investments to make to help reduce the risk of loss during market swings. However, don’t mistake hedging for an insurance policy. It doesn’t mean you are paying someone to take on risk in the event something bad happens (like home or car insurance).
Hedging involves making one investment to potentially offset another investment.
Sound complicated? Here’s how it works.
Hedging your Investments
The easiest way to understand hedging is to look at an example. Let’s say you were heavily invested in a gold mining company. They are a large miner of gold and continue to preform well.
However, due to certain market conditions (maybe there is a lot of gold miners) you think the price of gold is going to fall by a lot. This would impact your stock in the gold mining company.
In order to protect yourself from this, you could by options. (Now I’m not going to go into how options work – if you’re a new investor you shouldn’t be investing in options…)
In this case you would buy put options on the gold mining company which would give you the right to sell shares in the company at a certain price (strike price). If the stock price drops below the strike price your loss in your original investment would be offset by the value of the put contract.
Invest for the Long Term
My advice? Don’t get involved in hedging. The purpose of this post was to help you understand what hedging means as it is a very commonly used practice by investing professionals.
If you are invested in mutual funds which are actively managed by portfolio managers this might be common and its important to understand how the managers might offset losses.
If you are invested in solid, blue chip companies then I wouldn’t be worried.
RECEIVE ACCESS TO MY STOCK PORTFOLIO AND MONTHLY STOCK ANALYSIS
Personally, I have never bought any investments to hedge my current portfolio. I like the way I’ve constructed it.
Invest for the long term and you don’t have to worry about market swings. Turn on that white noise machine and sleep soundly! Until 5:30am and the baby wakes up for the day…..
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