Unhedged portfolios have greatly outperformed those portfolios that have been hedged this past year. In fact, over this past decade, investors who have bought stocks and chosen not to hedge positions have been able to take full advantage of the gains one has seen in the underlying stocks one holds.
Indeed, for those bullish on the future of the stock market over the long-term, such a strategy is prudent. In general, I’m of the belief that a long-term buy and hold strategy with no hedging or exposure to negatively correlated assets is a good idea. If you think we’ll continue to see growth and productivity performance, betting on the opposite happening is not a good idea.
That said, from time to time, the market can price in too much exuberance with respect to long-term growth, and stock prices can become inflated. I think right now, we’re at the precipice of where valuations make sense. In fact, I think valuations have been out of whack in respect to what the future holds in terms of growth for some time.
Being hedged at a time like this could help smooth out returns over the long-term, particularly if one is concerned about a meaningful correction in the stock market in the near-term.
I think investors ought to have a long-term mindset with respect to owning stocks. That said, taking some short-term tactical measures to improve one’s risk adjusted returns in the short-term can be beneficial.
Invest wisely, my friends.
