So I covered what beta hedging is and how to do it. I also mentioned that it can’t guarantee your portfolio won’t suffer losses*. If you absolutely need to stop the bleeding, the easiest and simplest solution is the rolling stop loss.
Here is how it works:
- Evaluate various downside points in the market where you want to sell off portions your portfolio.
- This should be done before the market moves down. This way you ensure you have a plan and it’s not a panic move.
- Set up stop losses on stocks and ETFs at those downside price points. A stop-loss works as an automatic sell trigger. The price of the stop-loss is set below the current price, once the stock or ETF hits that point it is sold at the next tick.
- If you have a diversified portfolio you can set targets on the S&P 500 to sell off a portion of your portfolio. This way you don’t have the headaches of numerous individual stop-losses to set and re-set.
- The key is to stay disciplined. This is where the stop-loss has the advantage over the S&P 500 targets. The stop-loss is automatic, thus you can’t talk yourself out of selling.
- You also need to set upside targets. Why? This way you can lock in the gains.
- At the upside target you reset the stop-loss at a higher price, hence the term “rolling”. This ensures you keep at least some of that move up.
- The last thing to do is set a plan for what you will do once the stop-loss triggers. Do you go back in, and if so when and how? Again, this makes sure that you have a set plan in place and prevents you from making a rash decision.
As you can probably see, I am not against exiting positions as long as there is a plan in place and it’s not an impulse decision. If you have everything laid out and stay disciplined then you can liquidate parts of your portfolio in times of market stress without terribly compromising your long-term plan.
*No investment strategy can guarantee a profit or protect from a loss in a declining market.
