Instead, provide some protection for your portfolio through a select group of exchange-traded funds (ETFs). These funds provide you with a hedge against broader market pullbacks and can even let you target certain parts of the market that appear especially vulnerable.
The "global crisis" example
Hedging ETFs are also gaining traction because of the bifurcated nature of the global economy. The U.S. economy appears to be doing well, even as troubles in Europe deepen. The primary exposure that U.S. investors have to Europe is through large-cap stocks found in the S&P 500. By some estimates, roughly one-third of all sales generated by S&P 500 firms are in their European divisions.
If you think the U.S. will fare much better than Europe in 2013, then it might be wise to focus your investments on companies that derive most of their revenue domestically. And you can inoculate your portfolio against the global risks that U.S. multinationals face by buying shares of the ProShares UltraShort S&P500 (NYSE: SDS). This is known as a "2X" fund, which means it moves at twice the rate -- in the opposite direction -- of the index you aim to focus upon. In this example, a 5% drop in the export-focused S&P 500 would yield a 10% gain for this fund.
Today, at 11:20 AM PT: Get the Market Movements in Advance: William's Edge Webinar for October 24th, 2014 | John Ransom
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Today, at 11:20 AM PT: Get the Market Movements in Advance; Williams Edge Webinar for October 20th, 2014 | John Ransom