How Important is Asset Allocation? Part 2

Mark Wolfinger  Jul 16, 2009 2:00 pm

How Important is Asset Allocation? Part 2
 
How does an individual investor reduce the volatility of an investment portfolio and avoid devastating financial losses?
 

 
Why are collars so effective? As I described as a recent guest columnist for Steven Sear's column, "The Striking Price," in Barron's, collars can be used by both active and passive investors. Collars contain a built-in insurance policy (buy put options) -- and you choose your deductible. Collars include an income stream (sell call options) that pays for the cost of the puts.

The problem, or the sacrifice one makes when adopting a collar, is that profits can't exceed a specified maximum. That's true because you sell call options and those calls give someone else the right to take your stock by paying a previously agreed-upon price (strike price). Thus, if the underlying investment moves higher than that price, all profits above that price go to the call owner.

To me, this is an ideal situation. You can use collars for any portion of your holdings, or for the entire portfolio. This allows you to have as much protection as you feel you need, and enough upside potential to grow your net worth.

Note: Collars are just a way to get investors started with options. There are simpler strategies that provide exactly the same protection and returns as collars. Options are truly flexible investment tools.
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07-16-2009, 3:19 pm
So, I put a collar on a position, say with puts 10% under my purchase price. Then the market dives, I loose 10% and then the options expire.

I'm now down 10%, what now, if I put the collar on again, I will just break even on any re
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07-16-2009, 4:44 pm
How close is the Andrew Lo "alternate beta hedge fund replication" thesis to your book, "Create your own Hedge Fund" ? I think somewhat.. but I suspect subtly different.
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