Market Volatility Is Returning. Here’s the Playbook to Protect Your Gains | Chris Casey
Summary
Market Outlook: Strong YTD gains alongside a sharp pullback warrant proactive profit-locking and risk management.
Options Hedging: Use puts on indexes or stocks and volatility calls when complacency is high to mitigate drawdowns cost-effectively.
Long/Short Funds: Market-neutral and net-short ETFs/mutual funds can cushion equity exposure but may lag in strong bull markets.
Covered Calls: Writing calls can add 1–2% per cycle and enforce sell discipline at highs, while accepting assignment risk.
De-Risking with Income: Shift toward High Dividend Stocks and hold more Cash Allocation as short-term yields are attractive and valuations look stretched.
Bonds Strategy: Favor Short Duration Bonds and higher quality, recognizing 2022 showed stocks and bonds can decline together.
Diversification & Alternatives: Look beyond overlapping ETFs to include Alternative Investments, with gold/silver strength underscoring the case.
Execution & Taxes: Right-size positions, rebalance more in volatile periods, and employ Tax Loss Harvesting via disciplined swaps while avoiding wash-sale rules.
Transcript
investors in general should be nervous, not just because of what you mentioned as far as the recent kind of deterioration in the markets, but more importantly because they did so well before. There's some real strategies that people should at least consider to kind of lock in some of these gains before the end of the year. [music] Hi everyone, welcome to Wealthon. I'm Maggie Lake. Chris Casey, founder and managing director of Windrock Wealth Management, is here with us again to talk about how to lock in profits and protect your portfolio. Hi, Chris. How are you? >> Hey, Maggie. Good to see you again. >> Good to see you. Um, and just before we dive in, just a reminder, if you would like some more information about anything uh that you hear here today, you can get a free portfolio review from a member of the Windrock team. Just click the link in the description or head to wealthy.comfree. And I imagine that people are going to be super interested in this Chris because we are seeing a pretty sharp pullback in stocks especially technology le NASDAQ I think I I saw it's down over 5% just from October 31st just this month and we're only what 7 days in. So you know you see that kind of pullback and I think investors get really nervous and worried about losing all of those gains they've achieved you know when they're looking at their their statements. So, um, you're going to share some tools with us, um, or some strategies investors should be thinking about when it comes to trying to lock in, uh, those profits. So, just first of all, kind of level set, you know, how are you feeling about what we're seeing? And, you know, are you getting a lot of calls from people who are nervous about the the seeing a round trip on those hard one gains? No, not particularly. But investors in general should be nervous. Not just because of what you mentioned as far as the recent kind of deterioration in the markets, but more importantly because they did so well before that. So as of yesterday, this is early November, I think the S&P was up almost 15%, NASDAQ was up 20, but not so much, not only the magnitude is decent, but on top of that, the market breath, not just from across all asset classes. So, if you look at you'll commonly see uh return quilts where they stack, you know, different little tiles for different asset classes and they'll stack up which ones on a relative basis is outperforming others. And across the board, they're all up this year. So, everyone's sitting on some nice gains and you're right, with the recent downturns, there's some real strategies that people should at least consider to kind of lock in some of these gains before the end of the year. >> Yeah, I'm excited to unpack this. So, let's start with one, and that's hedging. I feel like people sort of get that's a smart thing to do, but I'm not really sure we all understand exactly what that entails. >> Yeah. And and by hedging, I just mean you're looking at investments that should do well when whatever you're hedging against goes down. So, it's helping to either mitigate losses or actually exceed your losses and have gains from it. And there's a couple different ways to do that. One is a classic paired trade. And that's where you match um let's say you like a particular sector, you like retail for whatever reason. Well, maybe you go long. So, you buy the stock you expect to do well and you short the stock that you think is the weak link in that uh in that space. So, it's kind of a repair trade. And there's actually ETFs and mutual funds that do this all day long. And they'll trade they'll they'll change their positioning from a market neutral to negative on the market. So, they're net short. They could be net long. And whether it's actively managed or passively, these ETFs tend to be they're called long short funds. great ways to protect your your equity uh exposure. Now, there are some downsides, right? They may take a while to actually generate gains. You may need a sustained downturn versus a sharp downturn. Um and they and they may underperform in bullish markets. So, sometimes people don't have tolerances for that. But I think long short funds are a great way to great thing that everyone should uh look at. And on top of that, and this is uh could take various forms, but options, options are a great way uh to really hedge your portfolio. And options, you know, have a kind of a bad rap. People hear options and they think, "Oh, you could lose a lot of money on those." >> You can you can lose everything. But the bottom line is for a small amount of money. It doesn't take much to really hedge your position using options. And there's different techniques to do that. >> Are we Is it fair to think about hedging as like insurance? Is that is that the right way to think about it? >> I would. And so for instance, using options different ways. One would be to buy a put on a position you have. You can do it on an index, you could do it on a stock. When you do that, you are effectively locking in >> um and you basically have insurance on that stock or index for anything at the strike price or below. So that is that's one um flavor if you will of using options uh that you can uh incorporate. >> What about uh anything around the VIX? So, you know, when things get dicey, I feel like we're always looking for volatility to go up or um [clears throat] how how how should we think about that? Is that part of the solution here? >> Yeah, we view volatility as a great proxy for a market downturn and the VIX is one measurement. There's others. Um some would argue that volatility is a bit muted today because of the rise of, you know, one day uh options that expire on the same day. But the reality is you can see any volatility measure will spike significantly with a downturn. So in complacent times a volatility index may be you know single digits. It may go up five to six times what it was and so-called you know a slow complacent bull market. So buying a call option, buying the right to buy that particular security, whatever it is that's measuring volatility is another great way to play or to hedge your portfolio, at least the equities. >> Yeah. Am I right in thinking you got to you got to make that decision ahead of the volatility though because you want to get it when it's cheap, right? Once things start moving, that's not the case anymore. >> That's true. And that's what everyone should keep in mind with with options because options can be pricey. You know, I mentioned it's in general a lowcost way to hedge your portfolio and it is. However, those options what you're paying can vary dramatically um in prices. So, you definitely want to anticipate that. You want to buy when everyone else is complacent and you want to lock that in for a long time out long time period to really protect your portfolio. >> Now, there's another one on the list um covered calls. So, so walk us through that. This is something I feel like we we have maybe a little bit of of knowledge of the other things you just mentioned, but this one may might be a little bit out of the sphere of what people are used to to dealing with. >> Yeah. And that's I think that's true. It's also kind of sad, right? Because I think it's the most it's the easiest one to implement. >> And I think it's also one that people should be doing frequently, not just to hedge your portfolio, but to augment it with some additional returns. So, um, when you're writing or you're selling a call, you're typically giving someone else the right to buy a position from you. So, it's an ETF stock, what have you. And there's a couple advantages to this. One is that if the stock never goes up, you just made the premium that was paid to you. So, that may not be a lot of money, maybe one or two% of the position, but when you annual annualize that, that adds up, right? And you could keep rolling these over and keep doing it and doing it. >> Now, you may want to consider doing it. um when a stock or index is hitting all-time highs. You know, maybe it'll retrace its movements, that's a great time to do it. A lot of people don't like writing covered calls. They don't like the concept because they're worried about the position being called from them. So, they're worried about it having to sell. >> Just to put theoretically, if you have a $100 stock and it goes to 150, and even if you told yourself before, I'm going to sell at 150, it's really hard to do that when it when it spikes up like that. And so calls allow you the option of forcing discipline as well because if the reality is if you're going to sell when it hits a certain point, >> why not [clears throat] pick up some extra returns in committing yourself to it? >> That's so interesting. And it's sort of like if you in your mind say, "Okay, I'm this kind of person or you know, this is my risk tolerance and I'm going to need this money by a certain point. I'm going to be disciplined." It makes you take profits. It forces you to take profits sort of on a regular basis if you're doing it right. >> Exactly. And like I said, it's a nice return. Yeah, it's 1 or 2% potentially, but that's maybe every 3 4 months that adds up. So, it's it's a nice it's a nice way to augment your returns um and protect yourself. Now, it doesn't obviously protect yourself from a big downturn, >> but you're making money if regardless if the stock goes up, as long as it's not called away from you, it's a win. If you're looking for a simple, secure way to invest and own physical gold and silver, visit our sister company, Hard Assets Alliance, at hardassetsallalliance.com. That's hardassallalliance.com. Yeah, it sounds a little bit like might help protect against greed, you know, when when you're seeing that like up and to the right, you you you know, sometimes uh you want to override override your rational mind and and just keep sort of doubling down. So that that's really interesting. Um the next one you have on the list is derrisking. Uh and I I think this is really interesting. So you have like a couple of different things in this bucket. And when we when you when we first said, "Oh, let's talk about this." In my mind, I think most of us say, "I want to protect my profits. I'm just going to move to all cash." It's like that's the only thing to do. Um which is clearly not the case from what you're telling us. So what does de-risisking look like? I mean, that might be part of it, right? >> It is part of it. I And I think today too many wealth managers advise people never to have cash, right? You have to be fully invested. I think that's that's pretty bad advice because what happens when there's a downturn, you you have got you have no money to avail yourself of opportunities as they present themselves. So, um, de-risking is simply changing the nature or the flavor of your portfolio to be more defensive or more aggressive or to be more defensive if you anticipate issues coming up. And what's that mean? So for equities, it could be I'm going to look at highpaying dividend stocks. >> And the reason those are defensive is because as long as that dividend is secure, as long as they're going to continue paying out the so the same amount, that stock can only fall so much. >> So if it's a $10 stock, it pays out 5% uh in a dividend yield. Well, if that stock falls in half, that dividend yield spikes. Right now it's at 10%. That attracts other buyers and it kind of buoys the price up. And so buying a dividend paying stock, high dividend paying stock, I think is is a defensive um measure that that kind of derisks your portfolio overall. It's also changing the sectors you're looking at. Don't be in highly cyclical industries, right? We see this time and time again. When there's a downturn, certain industries get hit far harder than others. So, you're going to want to avoid those. So, those those are just some examples as far as equities go of how to kind of derisk your portfolio. >> Yeah. Yeah. And dividends are another one of those things like they add up, you know, if you if you have either enough money or enough of them that they they really can sort of provide um some very nice income. What about bonds? There's been so much controversy about the role of bonds and portfolios. I feel like how are you thinking about that? >> Well, traditionally everyone just assumes and I think a lot of people still do assume that bonds are inversely correlated with stocks, right? So they do well when stocks do poorly. Mhm. >> 2022 should be a wakeup call to everybody if they have that mentality. Yes, historically they have, maybe they have been inverted, maybe they don't follow the same direction. 2022 was dramatically different. They both went down substantially. That's why 2022 was one of the worst uh years for returns even around even when you consider things like 2008. Um, so bondwise, people should derisk by looking at shorter duration bonds. And duration is just a fancy term for discussing how a bond reacts to movements in interest rates. And in general, if you have a shorter bond, meaning the time horizon shorter, matures in maybe one year, that certainly has a shorter duration than something matures in 30 years. So people should look at bonds by changing the duration, looking at um a shorter duration. They should also look at the types of bonds they're buying. So, you could be buying investment grade corporate. Traditionally, that would be considered more risky than short-term treasuries. Now, that may change because in France today, you could actually people are are viewing it as exactly the opposite. They have more faith in corporations than they do >> uh France. So, you'll see some bond yields actually um lower for corporate bonds. But that's another way to kind of hedge in as relates to bond land. >> And and you mentioned you should have cash. Is there a rule of thumb about how much cash we should have? I imagine it varies depending on the investor, but I especially when we've when we're sort of coming at a point where we're we have these markets sitting at record highs. How do you think about percentage of allocation when it's when it comes to cash? >> Yeah. A couple things um affect that. Not just the investor and their risk tolerances and and how much anxiety they have by not being in the market completely. That's that's one aspect. Certainly that's true. The other is the opportunity cost. And so to the extent you have short-term rates that are paying something fairly high, like I would argue today it's on a relative basis they're somewhat high, right? 4% for you go out 6 months, what have you. Um that's another reason because it's not the opportunity cost isn't as great by being out of the market so to speak. And then I think a third component perhaps most important would be your views on the market. So when you see valuations at all-time highs, when you see the debt situation in the United States completely out of control with no hope of ever fixing it, um, in my mind, then I would argue at these potential inflection points where we could see a dramatic downturn at some point, you want to be increasing your cash position into that. So those are some factors that go into why or or how large of a cash position one may want to consider. >> Uh, so that's d-risking. You also talk about diversification. I feel like sometimes people might group them all together or sort of get confused about which one to do. How how are you thinking about diversification? >> It is true. Some of these are overlapping a bit, right? Because diversification is theoretically a way to derisk a portfolio. Um but I think there's a lot of misconceptions about um diversification. It's not uncommon for instance for us to see maybe it's a prospect and we'll review their portfolio before they come become a client and they may say things like well I'm fully diversified. look, here's 20 ETFs I own. In reality is you're 100% not diversified um against US equity markets. And and frankly, a lot of those ETFs may have very uh overlapping positions >> or even if they're not overlapping, they may react the same way to a market downturn. So, a lot of people aren't as diversified as they may think. Um another aspect to consider is that diversification has its place, but sometimes people are overly reliant upon it, right? diversification doesn't necessarily um protect you from a downturn, but it could help mitigate losses and a pronounced downturn in certain areas. And I think in today's day and age, we're just talking about bonds and stocks. Um you have to look beyond that uh those two attributes or those two asset classes and start looking at alternatives. And that's going to become more and more pronounced over the next couple years as more and more alternatives um become available for people's retirement uh funds. Uh but that is definitely something people should consider. It's not just stocks and bonds. >> And if anything, they should know that after this year, right, we have gold hitting all-time highs and silver going gang busters, right? This this shows you that people should be considering alternatives and they should have been doing it for a while now. >> Yeah. you said something that really struck a chord uh and that is they think that that they're diversified uh but they're not because they're diversified across sectors which I think when we were talking before like again that it's it's a good idea to have that but it doesn't mean that you're not exposed to a general market downturn. That seems like diversification that would work in a business cycle maybe, but when you're talking about the risk of a broader downturn, you may not be diversified for that. >> That's true. And not only that, but it's also beyond your investment portfolio, right? If you own a business >> or maybe you're a high paid executive at some company, you have exposure there too, right? With a downturn, you could lose your job. The downturn, your business could suffer. So if you have a business and you make uh auto parts, maybe you should avoid having any exposure in your portfolio to auto parts, right? Like something like that. You have to keep that in mind, too. It goes beyond investment portfolios because diversification really helps everything uh as far as making money and protecting money. >> Yeah, that's a great point because you got we don't tend to think of our holistic life, you know, or our career as part of what we should be kind of plugging into the diversity of a portfolio. That's a fantastic point. talk to me a little about the about the ETF um sort of mirage of diversification too. I think this is so important because uh I you know not everyone digs into the sort of details when you're looking at an ETF. You know, you kind of go on the name and think, "Oh, okay. I'm I'm I have uh I really want to get exposure to, you know, Mag 7 or sort of semiconductors or let's pick something more trendy like quantum computing, say." Um well that might not be a great example because they're a little bit of smaller player but but and then you have sort of a vanilla large cap growth fund sitting over here. Like if you don't look at the holdings you may actually have the same you may be double exposed to a particular stock because both of those may have a very high holding of that right and and if you just went on the umbrella top you wouldn't know that. >> That's true. Um there could be mission creep, right? they change what they're doing from their pronounced, you know, stated goals, etc. >> Um, I think one of the reasons people tend to get in this trap where they don't have diversification, but they think they do is also from the way they select uh assets. So, they may be like for instance equities for ETFs, they may be looking at everything that performed well over the last year. Sometimes people just instinctively I don't want to look at that, you know, it had negative over the last 12 months, which is a horrible way to look at things, right? It's always perspective. It's all you have to know and and care about. And so if you're looking at if you're basing it on returns where you tend to be favorable only if they had such and such a return for last year or so a lot of times you'll end up buying similar assets. You'll have similar ETFs. And I think that's I think it's one of the ways that people get there is that they blindly kind of look at returns and they're not thinking about pro prospects. They're not thinking about the nature of these ETFs enough. >> Yeah, that's a great and and you have actively managed and passive too. That's another thing like you you sort of need to get in into the down and dirty details when you're thinking about this um to make sure that it's sort of serving your your goals. Uh you have sizing down as well. What do what do you mean by that? >> Position size. How how large of a position should anyone have in a stock or an ETF? And again, this is there's a lot of behavioral science that goes to this is why people have um mising their portfolio, but a lot of people will have a position that's just entirely too big and inappropriate. And you'll tend to see that for a couple reasons. One, maybe the stock went up quite a bit and they won't they won't sell it, right? They're like, "Hey, I won't sell. I've got embedded gains." Um so that could be where they're letting tax implications guide investment decisions, which is never a good idea. Um, it could be that they fall in love with something. Some people, especially if it's like a theme stock or theme ETF, they may just love it, right? They may say, "I'm never selling Tesla because I just love Tesla." What have you. >> Exactly what I was thinking. Tesla and video are the two two names that just popped into my mind. >> You get a lot of people like that. Um, and there's other reasons, too. The exact opposite. you may have embedded gain or embedded losses that are significant and they won't sell um because they just can't mentally accept the fact that there's a loss there. So, they will hold off on selling even though it's the right thing to do. So, position sizing, there's no uh you know hard set rule as to what's too big. It depends on a variety of circumstances, but in general, if you have a stock that's over, you know, four or five% of your portfolio, you really need to think about trimming that back. That's good advice for everyone to cast cast a an eye down and you got to check, right? Because as you say, like things change and it may have grown. It may have started out like that, but you may find yourself in a position where that is now the case and you need to do something about it. So those are some of the strategies. This one I think is more behavioral. Um, and you say be disciplined. >> Yeah, I think disciplined execution maybe is the most important thing. So no matter what strategy you embrace, making sure you do it and you're disciplined um is is extremely important. Uh to give you an example just from a sizing perspective, you want to periodically look at your portfolio. You want to have some guidelines that you're going to stick to and you want to do an ad at hot basis to the extent that the market warrants you looking at it again. So just some basic in general I think the biggest impediment to everyone achieving optimized returns is themselves >> and that's why self- serving but I think everyone should consider having an adviser but on top of that I mean you really do need to fight your mentality everyone is is um plagued by a variety of different behaviorals behaviors uh that have been ingrained in them just from investing or just based on human nature. and whether it's recency bias, confirmation bias, all these different things. And so just being disciplined about something I think does wonders to a portfolio. >> I think that's that's such an interesting observation and and so true. And and I I think by the way the best money managers are always challenging themselves and often they'll have a sort of committee to challenge each other to make sure that they're not falling victim to that, right? Um, but that recency bias, uh, I had a lot of people say after the great financial crisis that they had sort of a version of PTSD and could feel themselves kind of re kept reverting back to what happened in that moment. And so it's important to understand what's going on, right? Yes, lessons learned, but that also can't be the guide for everything. You know, you're sort of, you know, you have a bias toward that. So, I think that's a really fantastic observation. Um, there's another one that, and this comes up all the time, tax loss harvesting. Um, people really, I'm assuming what you mean by that is people really don't want to pay taxes on their gains, right? >> Yeah. Well, not only that, but despite that, despite that incentive, a lot of people don't avail themselves of harvesting tax losses like they should. And I think part of it's because this mentality maybe they are wedded to a particular investment and they don't realize um they could buy an alternative investment that maybe is similar enough not too similar because the wash sale rule is that you can't have something that's substantially uh similar. Um but if you're looking at um you know protect a retailer that you really like maybe there's the second best retailer in that space you could go to. Right? So, it's things like that, swapping out, taking your losses, being disciplined about it. It it does wonders. >> So, don't worry about, you know, like be smart about paying taxes on the winners, but also like let go of the losers. You're saying just let go of the losers. Take the advantage on that and redeploy that capital someplace else. >> Absolutely. And I think that's the other uh main issue a lot of people have. Not only are they fighting themselves a lot of times and their behaviors, but on top of that, some people are so tax adverse >> that they won't generate any gains, right? They're just like, you know, I don't want to pay taxes. I refuse to do that. And when you when you start putting tax decisions ahead of investment decisions, that's recipe for disaster because a lot of bad outcomes are going to happen. >> I think that's so true. And then on the downside, I think that there's again an emotional feeling like I I think I'm right about this company and one of these days it's going to happen, right? Like I I hate to sell it before like they hit the home run or they they sort of But you can be stuck in that for so long. >> That's true. Everyone's waiting for something to happen, waiting, waiting. It makes sense to put time limits on it. It makes sense to challenge yourself all the time. And that's why like investment committees like we here we try to challenge each other, right? Hey, the last thing you want is everyone on board thinking the same way, right? You need people thinking differently, challenging perspectives, talking about what could happen, unforeseen um issues, because back to recency bias. It's just like when you see someone outside without an umbrella, right? Well, we all knew it was going to rain today, but they didn't it didn't rain yesterday, so they just assumed when they walked out the door it was fine. But that's People have that in their nature and it translates into their portfolios all the time. >> Yeah. Yeah. Gosh. I some of this is hitting home for me. Um what about what what about rebalancing? So I think we kind of know that but but how often what what's best rule of thumb for that? >> Oh boy. Well that varies. I mean I tend to be a little bit more concentrated probably in my portfolio than than a lot of people would be. Um because I'm more of a uh instead of having all your eggs or your eggs in different baskets. I I like having this argues against what I was talking about. I like having most of the eggs in in a basket and watching it very carefully. Right. That's that's another way. So regardless of your circumstances, it makes sense to routinely do this. Now, what's routine? >> You know, probably once a quarter at least, >> but depending on the nature of your assets, your nature of your investments, you may want to do it more frequently depending on um, you know, the market moves, you may want to do it more frequently than that. So, volatile times. I mean, this year, we've certainly seen that. Everything from the the liberation day uh downturn that happened in the markets to what's going on right now, there's a lot of volatility. So more volatility, look at it more frequently. >> Yeah, you bring up a really good point, too. We talked about diversification, but you can go the other way, too. You could be so diluted that you can't pay attention to everything and you have too many investments and you're not being smart about it. So, like there's a there's a sort of a sweet spot for I I think diversification, right? Because you don't want to you don't want to have so many things you don't even know you own it. >> That's true. And there's also a lot of studies that have been done that will demonstrate, hey, outside of and there's different studies that have different numbers. let's call it 15 to 30 positions, you're really not adding any kind, you're not lowering your risk and you're not increasing your return by diversifying from those levels. And you're right with your point is just keeping track of this. I mean, if you don't have an adviser, it's a full-time job and it's really tough to do to be on top of things if you have 50 positions and >> it's probably like we were talking about, it's probably unwarranted. >> Um, it just makes things very unmanageable. >> Yeah. Yeah. Great stuff, Chris. Thank you so much for this. I think this is such a timely conversation and something that um I think we all know we need to do, but we we maybe hopefully this this gives us some vocabulary and tools to make sure that we are being disciplined and and taking care of those gains. So, thank you for that. >> Got it. Thank you, Maggie. If you would like to check and see if you are doing enough to lock in your profits or just get an overall sense of uh protecting your portfolio and doing some due diligence, you can get a free portfolio review with a member of the windrock team by clicking the link in the description or heading to wealthon.comfree. Thanks so much for watching. We'll see you again next time.
Market Volatility Is Returning. Here’s the Playbook to Protect Your Gains | Chris Casey
Summary
Transcript
investors in general should be nervous, not just because of what you mentioned as far as the recent kind of deterioration in the markets, but more importantly because they did so well before. There's some real strategies that people should at least consider to kind of lock in some of these gains before the end of the year. [music] Hi everyone, welcome to Wealthon. I'm Maggie Lake. Chris Casey, founder and managing director of Windrock Wealth Management, is here with us again to talk about how to lock in profits and protect your portfolio. Hi, Chris. How are you? >> Hey, Maggie. Good to see you again. >> Good to see you. Um, and just before we dive in, just a reminder, if you would like some more information about anything uh that you hear here today, you can get a free portfolio review from a member of the Windrock team. Just click the link in the description or head to wealthy.comfree. And I imagine that people are going to be super interested in this Chris because we are seeing a pretty sharp pullback in stocks especially technology le NASDAQ I think I I saw it's down over 5% just from October 31st just this month and we're only what 7 days in. So you know you see that kind of pullback and I think investors get really nervous and worried about losing all of those gains they've achieved you know when they're looking at their their statements. So, um, you're going to share some tools with us, um, or some strategies investors should be thinking about when it comes to trying to lock in, uh, those profits. So, just first of all, kind of level set, you know, how are you feeling about what we're seeing? And, you know, are you getting a lot of calls from people who are nervous about the the seeing a round trip on those hard one gains? No, not particularly. But investors in general should be nervous. Not just because of what you mentioned as far as the recent kind of deterioration in the markets, but more importantly because they did so well before that. So as of yesterday, this is early November, I think the S&P was up almost 15%, NASDAQ was up 20, but not so much, not only the magnitude is decent, but on top of that, the market breath, not just from across all asset classes. So, if you look at you'll commonly see uh return quilts where they stack, you know, different little tiles for different asset classes and they'll stack up which ones on a relative basis is outperforming others. And across the board, they're all up this year. So, everyone's sitting on some nice gains and you're right, with the recent downturns, there's some real strategies that people should at least consider to kind of lock in some of these gains before the end of the year. >> Yeah, I'm excited to unpack this. So, let's start with one, and that's hedging. I feel like people sort of get that's a smart thing to do, but I'm not really sure we all understand exactly what that entails. >> Yeah. And and by hedging, I just mean you're looking at investments that should do well when whatever you're hedging against goes down. So, it's helping to either mitigate losses or actually exceed your losses and have gains from it. And there's a couple different ways to do that. One is a classic paired trade. And that's where you match um let's say you like a particular sector, you like retail for whatever reason. Well, maybe you go long. So, you buy the stock you expect to do well and you short the stock that you think is the weak link in that uh in that space. So, it's kind of a repair trade. And there's actually ETFs and mutual funds that do this all day long. And they'll trade they'll they'll change their positioning from a market neutral to negative on the market. So, they're net short. They could be net long. And whether it's actively managed or passively, these ETFs tend to be they're called long short funds. great ways to protect your your equity uh exposure. Now, there are some downsides, right? They may take a while to actually generate gains. You may need a sustained downturn versus a sharp downturn. Um and they and they may underperform in bullish markets. So, sometimes people don't have tolerances for that. But I think long short funds are a great way to great thing that everyone should uh look at. And on top of that, and this is uh could take various forms, but options, options are a great way uh to really hedge your portfolio. And options, you know, have a kind of a bad rap. People hear options and they think, "Oh, you could lose a lot of money on those." >> You can you can lose everything. But the bottom line is for a small amount of money. It doesn't take much to really hedge your position using options. And there's different techniques to do that. >> Are we Is it fair to think about hedging as like insurance? Is that is that the right way to think about it? >> I would. And so for instance, using options different ways. One would be to buy a put on a position you have. You can do it on an index, you could do it on a stock. When you do that, you are effectively locking in >> um and you basically have insurance on that stock or index for anything at the strike price or below. So that is that's one um flavor if you will of using options uh that you can uh incorporate. >> What about uh anything around the VIX? So, you know, when things get dicey, I feel like we're always looking for volatility to go up or um [clears throat] how how how should we think about that? Is that part of the solution here? >> Yeah, we view volatility as a great proxy for a market downturn and the VIX is one measurement. There's others. Um some would argue that volatility is a bit muted today because of the rise of, you know, one day uh options that expire on the same day. But the reality is you can see any volatility measure will spike significantly with a downturn. So in complacent times a volatility index may be you know single digits. It may go up five to six times what it was and so-called you know a slow complacent bull market. So buying a call option, buying the right to buy that particular security, whatever it is that's measuring volatility is another great way to play or to hedge your portfolio, at least the equities. >> Yeah. Am I right in thinking you got to you got to make that decision ahead of the volatility though because you want to get it when it's cheap, right? Once things start moving, that's not the case anymore. >> That's true. And that's what everyone should keep in mind with with options because options can be pricey. You know, I mentioned it's in general a lowcost way to hedge your portfolio and it is. However, those options what you're paying can vary dramatically um in prices. So, you definitely want to anticipate that. You want to buy when everyone else is complacent and you want to lock that in for a long time out long time period to really protect your portfolio. >> Now, there's another one on the list um covered calls. So, so walk us through that. This is something I feel like we we have maybe a little bit of of knowledge of the other things you just mentioned, but this one may might be a little bit out of the sphere of what people are used to to dealing with. >> Yeah. And that's I think that's true. It's also kind of sad, right? Because I think it's the most it's the easiest one to implement. >> And I think it's also one that people should be doing frequently, not just to hedge your portfolio, but to augment it with some additional returns. So, um, when you're writing or you're selling a call, you're typically giving someone else the right to buy a position from you. So, it's an ETF stock, what have you. And there's a couple advantages to this. One is that if the stock never goes up, you just made the premium that was paid to you. So, that may not be a lot of money, maybe one or two% of the position, but when you annual annualize that, that adds up, right? And you could keep rolling these over and keep doing it and doing it. >> Now, you may want to consider doing it. um when a stock or index is hitting all-time highs. You know, maybe it'll retrace its movements, that's a great time to do it. A lot of people don't like writing covered calls. They don't like the concept because they're worried about the position being called from them. So, they're worried about it having to sell. >> Just to put theoretically, if you have a $100 stock and it goes to 150, and even if you told yourself before, I'm going to sell at 150, it's really hard to do that when it when it spikes up like that. And so calls allow you the option of forcing discipline as well because if the reality is if you're going to sell when it hits a certain point, >> why not [clears throat] pick up some extra returns in committing yourself to it? >> That's so interesting. And it's sort of like if you in your mind say, "Okay, I'm this kind of person or you know, this is my risk tolerance and I'm going to need this money by a certain point. I'm going to be disciplined." It makes you take profits. It forces you to take profits sort of on a regular basis if you're doing it right. >> Exactly. And like I said, it's a nice return. Yeah, it's 1 or 2% potentially, but that's maybe every 3 4 months that adds up. So, it's it's a nice it's a nice way to augment your returns um and protect yourself. Now, it doesn't obviously protect yourself from a big downturn, >> but you're making money if regardless if the stock goes up, as long as it's not called away from you, it's a win. If you're looking for a simple, secure way to invest and own physical gold and silver, visit our sister company, Hard Assets Alliance, at hardassetsallalliance.com. That's hardassallalliance.com. Yeah, it sounds a little bit like might help protect against greed, you know, when when you're seeing that like up and to the right, you you you know, sometimes uh you want to override override your rational mind and and just keep sort of doubling down. So that that's really interesting. Um the next one you have on the list is derrisking. Uh and I I think this is really interesting. So you have like a couple of different things in this bucket. And when we when you when we first said, "Oh, let's talk about this." In my mind, I think most of us say, "I want to protect my profits. I'm just going to move to all cash." It's like that's the only thing to do. Um which is clearly not the case from what you're telling us. So what does de-risisking look like? I mean, that might be part of it, right? >> It is part of it. I And I think today too many wealth managers advise people never to have cash, right? You have to be fully invested. I think that's that's pretty bad advice because what happens when there's a downturn, you you have got you have no money to avail yourself of opportunities as they present themselves. So, um, de-risking is simply changing the nature or the flavor of your portfolio to be more defensive or more aggressive or to be more defensive if you anticipate issues coming up. And what's that mean? So for equities, it could be I'm going to look at highpaying dividend stocks. >> And the reason those are defensive is because as long as that dividend is secure, as long as they're going to continue paying out the so the same amount, that stock can only fall so much. >> So if it's a $10 stock, it pays out 5% uh in a dividend yield. Well, if that stock falls in half, that dividend yield spikes. Right now it's at 10%. That attracts other buyers and it kind of buoys the price up. And so buying a dividend paying stock, high dividend paying stock, I think is is a defensive um measure that that kind of derisks your portfolio overall. It's also changing the sectors you're looking at. Don't be in highly cyclical industries, right? We see this time and time again. When there's a downturn, certain industries get hit far harder than others. So, you're going to want to avoid those. So, those those are just some examples as far as equities go of how to kind of derisk your portfolio. >> Yeah. Yeah. And dividends are another one of those things like they add up, you know, if you if you have either enough money or enough of them that they they really can sort of provide um some very nice income. What about bonds? There's been so much controversy about the role of bonds and portfolios. I feel like how are you thinking about that? >> Well, traditionally everyone just assumes and I think a lot of people still do assume that bonds are inversely correlated with stocks, right? So they do well when stocks do poorly. Mhm. >> 2022 should be a wakeup call to everybody if they have that mentality. Yes, historically they have, maybe they have been inverted, maybe they don't follow the same direction. 2022 was dramatically different. They both went down substantially. That's why 2022 was one of the worst uh years for returns even around even when you consider things like 2008. Um, so bondwise, people should derisk by looking at shorter duration bonds. And duration is just a fancy term for discussing how a bond reacts to movements in interest rates. And in general, if you have a shorter bond, meaning the time horizon shorter, matures in maybe one year, that certainly has a shorter duration than something matures in 30 years. So people should look at bonds by changing the duration, looking at um a shorter duration. They should also look at the types of bonds they're buying. So, you could be buying investment grade corporate. Traditionally, that would be considered more risky than short-term treasuries. Now, that may change because in France today, you could actually people are are viewing it as exactly the opposite. They have more faith in corporations than they do >> uh France. So, you'll see some bond yields actually um lower for corporate bonds. But that's another way to kind of hedge in as relates to bond land. >> And and you mentioned you should have cash. Is there a rule of thumb about how much cash we should have? I imagine it varies depending on the investor, but I especially when we've when we're sort of coming at a point where we're we have these markets sitting at record highs. How do you think about percentage of allocation when it's when it comes to cash? >> Yeah. A couple things um affect that. Not just the investor and their risk tolerances and and how much anxiety they have by not being in the market completely. That's that's one aspect. Certainly that's true. The other is the opportunity cost. And so to the extent you have short-term rates that are paying something fairly high, like I would argue today it's on a relative basis they're somewhat high, right? 4% for you go out 6 months, what have you. Um that's another reason because it's not the opportunity cost isn't as great by being out of the market so to speak. And then I think a third component perhaps most important would be your views on the market. So when you see valuations at all-time highs, when you see the debt situation in the United States completely out of control with no hope of ever fixing it, um, in my mind, then I would argue at these potential inflection points where we could see a dramatic downturn at some point, you want to be increasing your cash position into that. So those are some factors that go into why or or how large of a cash position one may want to consider. >> Uh, so that's d-risking. You also talk about diversification. I feel like sometimes people might group them all together or sort of get confused about which one to do. How how are you thinking about diversification? >> It is true. Some of these are overlapping a bit, right? Because diversification is theoretically a way to derisk a portfolio. Um but I think there's a lot of misconceptions about um diversification. It's not uncommon for instance for us to see maybe it's a prospect and we'll review their portfolio before they come become a client and they may say things like well I'm fully diversified. look, here's 20 ETFs I own. In reality is you're 100% not diversified um against US equity markets. And and frankly, a lot of those ETFs may have very uh overlapping positions >> or even if they're not overlapping, they may react the same way to a market downturn. So, a lot of people aren't as diversified as they may think. Um another aspect to consider is that diversification has its place, but sometimes people are overly reliant upon it, right? diversification doesn't necessarily um protect you from a downturn, but it could help mitigate losses and a pronounced downturn in certain areas. And I think in today's day and age, we're just talking about bonds and stocks. Um you have to look beyond that uh those two attributes or those two asset classes and start looking at alternatives. And that's going to become more and more pronounced over the next couple years as more and more alternatives um become available for people's retirement uh funds. Uh but that is definitely something people should consider. It's not just stocks and bonds. >> And if anything, they should know that after this year, right, we have gold hitting all-time highs and silver going gang busters, right? This this shows you that people should be considering alternatives and they should have been doing it for a while now. >> Yeah. you said something that really struck a chord uh and that is they think that that they're diversified uh but they're not because they're diversified across sectors which I think when we were talking before like again that it's it's a good idea to have that but it doesn't mean that you're not exposed to a general market downturn. That seems like diversification that would work in a business cycle maybe, but when you're talking about the risk of a broader downturn, you may not be diversified for that. >> That's true. And not only that, but it's also beyond your investment portfolio, right? If you own a business >> or maybe you're a high paid executive at some company, you have exposure there too, right? With a downturn, you could lose your job. The downturn, your business could suffer. So if you have a business and you make uh auto parts, maybe you should avoid having any exposure in your portfolio to auto parts, right? Like something like that. You have to keep that in mind, too. It goes beyond investment portfolios because diversification really helps everything uh as far as making money and protecting money. >> Yeah, that's a great point because you got we don't tend to think of our holistic life, you know, or our career as part of what we should be kind of plugging into the diversity of a portfolio. That's a fantastic point. talk to me a little about the about the ETF um sort of mirage of diversification too. I think this is so important because uh I you know not everyone digs into the sort of details when you're looking at an ETF. You know, you kind of go on the name and think, "Oh, okay. I'm I'm I have uh I really want to get exposure to, you know, Mag 7 or sort of semiconductors or let's pick something more trendy like quantum computing, say." Um well that might not be a great example because they're a little bit of smaller player but but and then you have sort of a vanilla large cap growth fund sitting over here. Like if you don't look at the holdings you may actually have the same you may be double exposed to a particular stock because both of those may have a very high holding of that right and and if you just went on the umbrella top you wouldn't know that. >> That's true. Um there could be mission creep, right? they change what they're doing from their pronounced, you know, stated goals, etc. >> Um, I think one of the reasons people tend to get in this trap where they don't have diversification, but they think they do is also from the way they select uh assets. So, they may be like for instance equities for ETFs, they may be looking at everything that performed well over the last year. Sometimes people just instinctively I don't want to look at that, you know, it had negative over the last 12 months, which is a horrible way to look at things, right? It's always perspective. It's all you have to know and and care about. And so if you're looking at if you're basing it on returns where you tend to be favorable only if they had such and such a return for last year or so a lot of times you'll end up buying similar assets. You'll have similar ETFs. And I think that's I think it's one of the ways that people get there is that they blindly kind of look at returns and they're not thinking about pro prospects. They're not thinking about the nature of these ETFs enough. >> Yeah, that's a great and and you have actively managed and passive too. That's another thing like you you sort of need to get in into the down and dirty details when you're thinking about this um to make sure that it's sort of serving your your goals. Uh you have sizing down as well. What do what do you mean by that? >> Position size. How how large of a position should anyone have in a stock or an ETF? And again, this is there's a lot of behavioral science that goes to this is why people have um mising their portfolio, but a lot of people will have a position that's just entirely too big and inappropriate. And you'll tend to see that for a couple reasons. One, maybe the stock went up quite a bit and they won't they won't sell it, right? They're like, "Hey, I won't sell. I've got embedded gains." Um so that could be where they're letting tax implications guide investment decisions, which is never a good idea. Um, it could be that they fall in love with something. Some people, especially if it's like a theme stock or theme ETF, they may just love it, right? They may say, "I'm never selling Tesla because I just love Tesla." What have you. >> Exactly what I was thinking. Tesla and video are the two two names that just popped into my mind. >> You get a lot of people like that. Um, and there's other reasons, too. The exact opposite. you may have embedded gain or embedded losses that are significant and they won't sell um because they just can't mentally accept the fact that there's a loss there. So, they will hold off on selling even though it's the right thing to do. So, position sizing, there's no uh you know hard set rule as to what's too big. It depends on a variety of circumstances, but in general, if you have a stock that's over, you know, four or five% of your portfolio, you really need to think about trimming that back. That's good advice for everyone to cast cast a an eye down and you got to check, right? Because as you say, like things change and it may have grown. It may have started out like that, but you may find yourself in a position where that is now the case and you need to do something about it. So those are some of the strategies. This one I think is more behavioral. Um, and you say be disciplined. >> Yeah, I think disciplined execution maybe is the most important thing. So no matter what strategy you embrace, making sure you do it and you're disciplined um is is extremely important. Uh to give you an example just from a sizing perspective, you want to periodically look at your portfolio. You want to have some guidelines that you're going to stick to and you want to do an ad at hot basis to the extent that the market warrants you looking at it again. So just some basic in general I think the biggest impediment to everyone achieving optimized returns is themselves >> and that's why self- serving but I think everyone should consider having an adviser but on top of that I mean you really do need to fight your mentality everyone is is um plagued by a variety of different behaviorals behaviors uh that have been ingrained in them just from investing or just based on human nature. and whether it's recency bias, confirmation bias, all these different things. And so just being disciplined about something I think does wonders to a portfolio. >> I think that's that's such an interesting observation and and so true. And and I I think by the way the best money managers are always challenging themselves and often they'll have a sort of committee to challenge each other to make sure that they're not falling victim to that, right? Um, but that recency bias, uh, I had a lot of people say after the great financial crisis that they had sort of a version of PTSD and could feel themselves kind of re kept reverting back to what happened in that moment. And so it's important to understand what's going on, right? Yes, lessons learned, but that also can't be the guide for everything. You know, you're sort of, you know, you have a bias toward that. So, I think that's a really fantastic observation. Um, there's another one that, and this comes up all the time, tax loss harvesting. Um, people really, I'm assuming what you mean by that is people really don't want to pay taxes on their gains, right? >> Yeah. Well, not only that, but despite that, despite that incentive, a lot of people don't avail themselves of harvesting tax losses like they should. And I think part of it's because this mentality maybe they are wedded to a particular investment and they don't realize um they could buy an alternative investment that maybe is similar enough not too similar because the wash sale rule is that you can't have something that's substantially uh similar. Um but if you're looking at um you know protect a retailer that you really like maybe there's the second best retailer in that space you could go to. Right? So, it's things like that, swapping out, taking your losses, being disciplined about it. It it does wonders. >> So, don't worry about, you know, like be smart about paying taxes on the winners, but also like let go of the losers. You're saying just let go of the losers. Take the advantage on that and redeploy that capital someplace else. >> Absolutely. And I think that's the other uh main issue a lot of people have. Not only are they fighting themselves a lot of times and their behaviors, but on top of that, some people are so tax adverse >> that they won't generate any gains, right? They're just like, you know, I don't want to pay taxes. I refuse to do that. And when you when you start putting tax decisions ahead of investment decisions, that's recipe for disaster because a lot of bad outcomes are going to happen. >> I think that's so true. And then on the downside, I think that there's again an emotional feeling like I I think I'm right about this company and one of these days it's going to happen, right? Like I I hate to sell it before like they hit the home run or they they sort of But you can be stuck in that for so long. >> That's true. Everyone's waiting for something to happen, waiting, waiting. It makes sense to put time limits on it. It makes sense to challenge yourself all the time. And that's why like investment committees like we here we try to challenge each other, right? Hey, the last thing you want is everyone on board thinking the same way, right? You need people thinking differently, challenging perspectives, talking about what could happen, unforeseen um issues, because back to recency bias. It's just like when you see someone outside without an umbrella, right? Well, we all knew it was going to rain today, but they didn't it didn't rain yesterday, so they just assumed when they walked out the door it was fine. But that's People have that in their nature and it translates into their portfolios all the time. >> Yeah. Yeah. Gosh. I some of this is hitting home for me. Um what about what what about rebalancing? So I think we kind of know that but but how often what what's best rule of thumb for that? >> Oh boy. Well that varies. I mean I tend to be a little bit more concentrated probably in my portfolio than than a lot of people would be. Um because I'm more of a uh instead of having all your eggs or your eggs in different baskets. I I like having this argues against what I was talking about. I like having most of the eggs in in a basket and watching it very carefully. Right. That's that's another way. So regardless of your circumstances, it makes sense to routinely do this. Now, what's routine? >> You know, probably once a quarter at least, >> but depending on the nature of your assets, your nature of your investments, you may want to do it more frequently depending on um, you know, the market moves, you may want to do it more frequently than that. So, volatile times. I mean, this year, we've certainly seen that. Everything from the the liberation day uh downturn that happened in the markets to what's going on right now, there's a lot of volatility. So more volatility, look at it more frequently. >> Yeah, you bring up a really good point, too. We talked about diversification, but you can go the other way, too. You could be so diluted that you can't pay attention to everything and you have too many investments and you're not being smart about it. So, like there's a there's a sort of a sweet spot for I I think diversification, right? Because you don't want to you don't want to have so many things you don't even know you own it. >> That's true. And there's also a lot of studies that have been done that will demonstrate, hey, outside of and there's different studies that have different numbers. let's call it 15 to 30 positions, you're really not adding any kind, you're not lowering your risk and you're not increasing your return by diversifying from those levels. And you're right with your point is just keeping track of this. I mean, if you don't have an adviser, it's a full-time job and it's really tough to do to be on top of things if you have 50 positions and >> it's probably like we were talking about, it's probably unwarranted. >> Um, it just makes things very unmanageable. >> Yeah. Yeah. Great stuff, Chris. Thank you so much for this. I think this is such a timely conversation and something that um I think we all know we need to do, but we we maybe hopefully this this gives us some vocabulary and tools to make sure that we are being disciplined and and taking care of those gains. So, thank you for that. >> Got it. Thank you, Maggie. If you would like to check and see if you are doing enough to lock in your profits or just get an overall sense of uh protecting your portfolio and doing some due diligence, you can get a free portfolio review with a member of the windrock team by clicking the link in the description or heading to wealthon.comfree. Thanks so much for watching. We'll see you again next time.