Sunday, February 25, 2007

Definition of the Day.... PORTFOLIO INSURANCE

From a basic definition:

Portfolio Insurance
1. A method of hedging a portfolio of stocks against the market risk by short selling stock index futures.

1. This hedging technique is frequently used by institutional investors when the market direction is uncertain or volatile. By short selling index futures they offset any downturns, but they also hinder any gains.

What I get sick of in reading the many blogs out there is the simplistic polarity of either "bulls are dumb", or "bears are evil" depending upon the perspective of the blogger (and boy could I name some names). Lost in the shuffle of bull vs bear argument is that enough unusual things are happening from subprime collapse to Iran nukes is that you can't go wrong with hedging or buying portfolio insurance to protect yourself.

1 comment:

65Trader said...

Hi Jim,
I just found your blog from some comments you left at ZenTraders blog. I have to say that I posted on my blog about a week ago about buying cheap puts as insurance. I guess you could say that I am a nervous bull (because my market timing models are bullish but they merely react to a decline, not predict it.)

I'm looking forward to following your blog and your insights on non-US equity markets (commodities, gold, etc.)