Portfolio protection

[tef85]

Hello there,
So far since having a job, I've only invested about half my life savings (yes stupid, but also grew up poor with no parents that could help out in a financial emergency, and the only inheritance I could expect are debts, so having a cushion was kinda critical for survival).

Anyways, I have a bit of work experience now and would like to start investing the other half, except for a 3 months run rate.

I naively assumed that I could invest a lump sum and then "protect" it with some kind of options for like 5% of the total amount. But looking at the actual options/ warrants, its MUCH more expensive and the knock out prices are so close to the current market price, that it's statistically cheaper not to protect at all.

That is, from the perspective of someone lacking any in-depth knowledge with warrants and options, and based on 2 hours of research.

Long story short, how would you protect a lump sum investment? I am not talking about diversification, but actual protection of the nominal CHF amount (mathematically) with derivatives.

Are there any tools that help me find the right products? I'd assume there should be plenty, but I have not yet found anything useful yet.

 

[bman10123]

@tef85 So what you are trying is to protect your entire portfolio against volatility? That may very well end up in your portfolio being very well protected against aby kind of movement - including movements upwards.

If I understand it correctly, you want to make sure to never "lose" money in case you need to access it? Since such kind of protection will always cost you performance, I don't think that's what one actually wants.

In my opinion it would make more sense to define a bad weather fund for anything unforseen. The size of it will depend on your circumstances: what's the worst that could happen to you and how much could it cost? Then keep this money in an easy to access account. The rest of your money you invest without any crazy protection and let it allow to fluctuate - in the long run, this'll go up, but may experience temporary losses along the way.

If you split your overall wealth into specialized parts (e.g. a stable part and a risky part), it'll be easier to know what you have and when you need to worry about your money.

 

[tef85]

@bman10123 Not continuously of course, since that makes no mathematical sense as you describe. More like an initial protection that "washes out" over the years. But the longer I think about it, the less viable it seems actually.

 

[bman10123]

@tef85 If you want a part of your money not to be vulnerable to sudden fluctuation, you could split your portfolio into a stable and a risky part, but after that only invest in the risky part - that way the stable part become smaller over time, it kinda "washes out", as you said.

Maye a solution would be to to start with X% stocks and (100-X)% bonds. The bonds would then be the stable part, while you keep investing in stocks. Over time, the share of your stocks will grow larger (as you invest in it) and at some point all bonds will be paid back to you.

 

[onewayjesus]

@tef85 You csn hedge against your portolio….but it makes not much sense in those amounts we are talking about.

E.g. investing into IVV and at the same time buying puts on it wirh expiry 2025 for example.
Rinse and repeat.

Does it make sense? Sometimes.
Can you do it? Yes.

Would I recommend it? No.

Buy and hold….thats why passive ETFs are the best…