Portfolio Insurance
One might expect that in a perfect market, stocks would all move independent of one another. However, as it is today this is not the case. Stocks are grouped into categories or sectors as they are called. If something happens to one company in a sector, the others might gain the rewards or punishment for it even if it isn’t relevant to the comany.
If you plan on never touching your investments for many years the fluctuations may not matter. However, if something comes up and money needs to be taken out of acct, these fluctuations could hurt you if your stocks are at a low.
Portfolio insurance can help with this. No, we are not talking about sophisticated hedging, but simply purchasing some stocks outside of your sectors to offset declines in your other stocks. Then your fluctuations won’t be as great.
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