Why I've Stopped 'Hedging' My Portfolio

Why It Matters

Because unnecessary hedging can shave off significant returns, investors who rely on it may underperform benchmarks and miss growth opportunities.

Key Takeaways

• Hedging costs often outweigh occasional market-down gains for investors
• Put options and shorts lose value when markets rebound quickly
• Historically, hedges succeed only about one‑fifth of the time
• Frequent hedging can drag long‑term portfolio returns downwards
• Prioritize strategic allocation over short‑term insurance tactics in investing

Summary

In a recent video, investor Adam explains why he no longer hedges his portfolio despite believing the market may be in a correction. He defines hedging as buying insurance—put options, short positions, or inverse ETFs—to profit if equities fall.

Adam notes that hedging is costly; the premium paid for puts or the drag from inverse ETFs erodes returns. He estimates hedges succeed only one out of five times, while four times the market rebounds, turning the hedge into a loss. Over the long run, this pattern reduces overall portfolio performance.

He illustrates the point with a simple quote: “One out of five times the market will go a lot lower… but four out of five times it reverses back up very strongly.” The example underscores that timing the market with insurance is more often a penalty than a payoff.

The takeaway for investors is to focus on core asset allocation and risk tolerance rather than short‑term protective bets. By avoiding frequent hedges, investors can preserve upside potential and improve compound returns, especially in a market that historically spends more time rising than falling.