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The markets are scary, right? Gut-wrenching, even. They take rallies that look strong at midday and wipe them out by market close.
It's the one thing that investors at all levels are feeling and can agree upon.
But it doesn't have to be.
There's one simple strategy you can add to your investing game plan that will "smooth out" the worst of the coronavirus-pandemic volatility and ease the impact of the big sell-offs that could still come our way.
It's your single most powerful tool to protect against the one thing we have right now: uncertainty.
It's called "hedging," and the way I'm proposing to do this is so simple that anyone can do it – even my 75-year-old mom.
Hedging Doesn't Have to Be a Scary Word
I'll be candid with you all: I've been doing this – investing and trading professionally – for 30 years, and I've never seen anything like this before.
That said, I'm all about action – about taking control of your own destiny. As a trader, my instinct is to turn volatility into profits. As an investor, my instinct is to look for bargains that will pay off in the long run.
In both cases, my instinct is to find ways to reduce risk – to minimize the damage.
And hedging risk is a great way to do that.
When I started in this business, the concept of "hedging" was reserved for the ultra-elite investment professionals. The idea that you could at least partly "insulate" your portfolio from wild drops or even a bear market was farfetched and reserved for those who paid enormous fees to their money managers.
The idea of a hedge is simple. Offset some or all the risk in your portfolio when the outlook is uncertain, market volatility is on the rise, and the stock market faces its greatest risk.
About the Author
Chris Johnson is a highly regarded equity and options analyst who has spent much of his nearly 30-year market career designing and interpreting complex models to help investment firms transform millions of data points into impressive gains for clients.
At heart Chris is a quant - like the "rocket scientists" of investing - with a specialty in applying advanced mathematics like stochastic calculus, linear algebra, differential equations, and statistics to Wall Street's data-rich environment.
He began building his proprietary models in 1998, analyzing about 2,000 records per day. Today, that database, which Chris designed and coded from scratch, analyzes a staggering 700,000 records per day. It's the secret behind his track record.
Chris holds degrees in finance, statistics, and accounting. He worked as a licensed broker for 11 years before taking on the role of Director of Quantitative Analysis at a big-name equity and options research firm for eight years. He recently served as Director of Research of a Cleveland-based investment firm responsible for hundreds of millions in AUM. He is also the Founder/CIO of ETF Advisory Research Partners since 2007, noted for its groundbreaking work in Behavioral Valuation systems. Their research is widely read by leaders in the RIA business.
Chris is ranked in the top 99.3% of financial bloggers and top 98.6% of overall experts by TipRanks, the track record registry of financial analysts dating back to January 2009.
He is a frequent commentator on financial markets for CNBC, Fox, Bloomberg TV, and CBS Radio and has been featured in Barron's, USA Today, Newsweek, and The Wall Street Journal, and numerous books.
Today, Chris is the editor of Night Trader and Strikepoint Trader and contributes to Money Morning as the Quant Analysis Specialist.