In my last post I reviewed the strategy of how reducing the beta can help protect if the market begins to move down*. So how do you do it?
It’s actually quite easy. You sell assets that have a high beta and buy assets that have a low beta. This in turn lowers your portfolio’s beta as a whole and makes it less sensitive to market moves.
High beta assets:
- Small Cap stocks
- Emerging Market stocks
- Real Estate stocks
- Large Cap stocks
- Developed Markets stocks
- Macro/Hedged Equity managers
I also mentioned in my last post the problems that selling presents and how beta hedging helps reduce or eliminate those:
- If and when do you get back in? You are staying in the market, just in assets that are less sensitive to market moves. Thus, is no decision about when to re-enter.
- Does being in cash compromise your long-term goals? Not really. By beta hedging within stocks you are simply just changing the composition of the growth side if the portfolio. Sure you have a lower upside, but you also have a lower downside.
- Is this a panic move? I hate panic moves, but in this case it doesn’t matter. You aren’t overhauling your portfolio, just lessening its sensitivity to the market.
I will say that lowering your portfolio’s beta is no panacea. If your beta is .70 and the market is down 20% you are still 14%. This might not be tolerable. Thus, in my next post I will cover prudent ways to sell.
*No investment strategy can guarantee a profit or protect from a loss in a declining market.
