Hedging Strategies Help Advisors Reduce Volatility in Client Portfolios

Recently we shared perspective for advisors around how hedging strategies help reduce risk and volatility as a guest contributor in TheStreet online.

Check out the full article here.

Below is an excerpt from the piece to help frame the foundation for the reason hedging works, especially against the backdrop of a traditional 60/40 portfolio. 

Hedging strategies can help financial advisers limit volatility in client portfolios, while also providing much-needed income for clients before or during retirement.

To invest is to take on risk. There is no other way. You cannot completely avoid, replace, or eradicate the risk present in any investment portfolio strategy. You can only manage it.

Some financial advisers use diversification to manage risk, which works fine, until it doesn’t, as seen during the steep market declines in March 2020 and September 2008.

Others might use the traditional 60/40 portfolio of stocks and bonds. Or the traditional rule of thumb of subtracting your client’s age from 100 to determine the percentage of stocks a client should be invested in given their proximity to retirement.

The challenge with having as much as 40% of a client’s portfolio in bonds is that bond holders may be taking on significant interest rate risk given inflation and the expected Federal Reserve tightening and rate hikes this year.

If you have clients asking you how to protect assets in a rising rate environment its time we talk.