While we love to see the markets hitting new highs, don’t forget that what goes up does come down. The stock market has rallied sharply so far this year, and we have yet to see the type of pullback that scares the living daylights out of us. This is the perfect time to slow down and protect your market gains.
Protect your market gains – now
There is little to fear right now, which bothers me. Corrections can/will happen without warning. They usually happen when everyone is leaning bullish, like they are now. I always compare it to a boat loaded with passengers who are all on one side. Eventually, the boat will tilt and throw everyone overboard. That’s the feeling I have right now.
Note that I’m not bearish; I’m cautious. Buy insurance for your portfolio (more on this below). Take risk off the table by selling positions. Rid your portfolio of underperforming stocks. All of these options will help protect your market gains and keep your investments fresh.
If you’re a regular reader, you know that “buy insurance” means adding some index put options to your portfolio. These are highly liquid instruments that are currently very inexpensive due to low volatility (the VIX currently sits in the 16% range. When the VIX is low it is implying cheap options all around, both puts and calls.)
Even better, demand for buying index puts is almost nonexistent. Why? The market doesn’t expect to see a large move downward. And herein lies the crux of my argument: Take out protection before disaster strikes, not while it’s happening. If your neighbor’s roof is on fire and winds are whipping the flames close to your house, are you going to jump on the phone with your insurance agent and ask for an increase in your fire insurance? You could, but they will probably laugh and hang up on you.
Add some put insurance today, sell winners and cut losers. You’ll probably sleep a little better tonight.