Last Friday I was fortunate to be the guest of @Liz Claman and @David Asman on Fox Business News after the bell segment. I really appreciate the chance to be on those panels. I have been a frequent guest from the floor of the CME over the past couple of years. This was the first time I was able to go to NYC and visit. While I was on the panel, I mentioned that the best strategy for long term investor who is long the stock indexes, especially via the Spider or Diamonds, that there was a strategy I liked when the market “looked” toppy. Let’s face it, for the past 5 years, we’ve heard a lot of gurus talking that the market was overbought time and time again. Every time there was a 200 point plus move it seemed there were a dozen “expert” calling the top and saying it was time to be 95% cash. Or worse, 95% cash and long gold as a hedge against the dollar collapsing along with our economy. The long gold/ short US equities/ long shotgun shells and canned good strategy has decimated a lot of folks who let fear and irrationality keep them from benefitting from the rally we had over the last 7 years. Just going back to In February of 2014 the SPH fell to a low of 1713, 13 months later, we posted a record high 2 weeks ago at 2117. The 95% cash folks kept their clients away from a 350 point rally, that’s only a 20% gain. It’s one thing to be bearish; it’s another thing to consistently be panic selling in the hole. Of course, this is just my opinion. In the long run, unless you are a successful day trader trading the S&P or Dow, you most likely should have no business trying to catch these volatile moves. Professional trader has a success rate of 7 %. So that means 93 % of the rest of the folks are losers when they try to consistently “time” the market. Which brings me to my point? I think an average investor who is long stocks in a managed form, either in an index fund or a basket of mutual funds has to identify their long term goal. Long term, the agreed best way to take advantage of equities, is to own a divers basket, i.e. the S&P 500. Dollar cost average into the long position. Leave it alone, during new highs, as well as when we have horrendously scary sell offs. Over time the historical rate of return for owning US equities in a basket, is 10%… Read Peter Lynch’s one up on Wall Street. Written in the 1980’s it lays out the benefits to that strategy, and the concept is pretty much universally accepted academically as well. And if you average 9% over time, you double your investment every 8 years. 72/ 9 = 8. The problem is, when you get emotional and want to sell your position, either it can be signaling a top or a bottom. Only someone with a functioning crystal ball can tell you the difference. What’s an average person to do that has big profits built up in their IRA or retirement funds. They have been rewarded by staying true to their long term goal. They did the right thing by dollar cost averaging come hell or high water…. But they are sitting here at the highs and are scared we’re going to have another 2009? Remember 2008/2009? The Dow went from 14,300 down to 6500, dropping 54% from its “high” value down to its “panic low”…. If someone remembers that pain and is worried, yet knows they need to stay long stocks to get that 9% average return and double their money every 8 years, what can you do? I would rather see someone buy an out of the money put option, as an insurance policy against the overall market having a 20% or greater correction. Pretty simple idea. The same way you insure your house against a disaster, buying a put in the S&P protects the value of that asset. However, here’s the catch…. You have to be able to be happy to buy that put, lose the value completely, and still maintain your long stock position in your portfolio. At the end of the day, 10 years from now you want to still be long the S&P when it’s trading at 4K… After all, that is your long term goal and your justification for owning US equities. Trading in and out and in and out is a fool’s game left to computers and professionals. 1) Own the basket. 2) When you get good multiple digit profits in place and want to keep the upside open but protect against a 2009 panic, then you need to have that S&P option in place. You need the option in place before the selloff happens… And here’s the hard part… No one can be sure exactly when that correction or bear market will come, or how long the bear market will be around once it gets here. 2) Just like you can’t build a house, not insure it and then call up an insurance broker after half of it burns down…. You can’t get the downside protection you need for your portfolio once the smoke has cleared after the correction. You simply cannot have your cake and eat it too. So owning the puts lets you protect the downside, while keeping the upside completely open… You’re shooting for the 8% but you’ve mitigated the fear of the market collapse by using the put option. Also, if you do have the puts in place; and the market collapses: The gain in your put options gives you a great opportunity. You can cash in your put insurance and reap the cash gains. Suddenly, you are in the enviable position of having stayed long your original position, but you also have fresh cash from the profit of your put. You are in a position to put that cash to work buying your favorite stocks or funds or more of the index while those assets are “on sale” and everyone else it selling them in the hole out of fear and panic. You have cash available to buy when everyone else is selling. Much like John Templeton’s “buy when there is blood in the streets” advises… Just food for thought and I wanted to clarify what I only had 15 seconds to speak about last Friday.