Hedge against fed rate increase?

[sv2007]

So, the last time when rate change possibility is interesting I posted a poll; it looks like this time there's some possibility (lower than 50%) of rate increasing. Anybody with significant amounts hedging?

[feh]

So, the last time when rate change possibility is interesting I posted a poll; it looks like this time there's some possibility (lower than 50%) of rate increasing. Anybody with significant amounts hedging?

Don't try to time the market. That goes for bonds as well as equities.

[sv2007]

I view hedging like buying insurance, not really timing the market. It is part of smoothing out the market at the cost of less return (e.g. insurance you don't use, you lose it. For example, if you didn't make any claims on you homeowner's policy last year, in a sense, you've lost that money). Same goes for hedging, when certain evens may happen, I take some steps to protect against a bad outcome.

So, continuing with the example, buying homeowner's insurance on your house (or landlord policies), in a way, you are hedging your house investment. So, the in same way, market investments can be insured.

[Jluke]

my 401k fund options were recently refreshed so I took the opportunity to move 25% to cash while investing the rest in newly available funds.

I stumbled on my 401k statement from 2008 a few months ago so it was a good reminder that the market doesn't always go up. I "lost" half of that amount at the time.

[sv2007]

my 401k fund options were recently refreshed so I took the opportunity to move 25% to cash while investing the rest in newly available funds.

I stumbled on my 401k statement from 2008 a few months ago so it was a good reminder that the market doesn't always go up. I "lost" half of that amount at the time.

Cash is always a good hedge; and a guarantee against volatility.

I've not taken up a hedge position wrt the coming fed meeting yet. Wife thinks it is unnecessary, but I'm not sure.

So wondering what others are doing.

[corn18]

This has been a hot topic since QE started and then ended. The market has been scared to death of a rate increase since 2011. And anyone that decided not to participate in 2011 has lost out on a LOT of gains in the longest bond bull market in history. Anyone in long bond funds over the past 2 years has seen remarkable returns.

To your question: I am hedging by slanting my 40% bond asset allocation to shorter term bonds. My longest average duration fund is 5.7 years. Theoretically, if interest rates rise, bond fund NAVs will go down. They should recover to normal within the average duration period. So, long bond funds will take a much bigger hit for a much longer time than shorter bond funds.

That's it. I do agree that hedging is NOT timing. I hedged BREXIT by shorting the S&P right before the vote. Market dropped, I sold the puts, made some money and then the market recovered. Had I not sold the puts right away, I'd be out the insurance money I paid.

Tom

[feh]

Sorry guys, but making investment choices based on what you (or the pundits) think will happen in the next weeks/months is the definition of market timing.

And remember - the value of bonds is set by the market, not the FOMC. After the fed raised rates last December, bond prices increased and the rate on the US 10 year fell.

[Jluke]

Sorry guys, but making investment choices based on what you (or the pundits) think will happen in the next weeks/months is the definition of market timing.

I am doing extended DCA in investing. I couldn't bring myself to put 300k in the market on one day across a few funds.

I also want to explore some of the new investment options that are available to me, which had never been available before.

[sv2007]

Sorry guys, but making investment choices based on what you (or the pundits) think will happen in the next weeks/months is the definition of market timing.

And remember - the value of bonds is set by the market, not the FOMC. After the fed raised rates last December, bond prices increased and the rate on the US 10 year fell.

Well, I don't think anybody in this thread said anything about the fed rates directly changing bond prices. You are the only one to bring it up.

Here, we are talking about taking protective measures against some event. To continue my example, if one owns a house on the coast and weather forecast says a hurricane is on the way next month, one hedge position might be to buy extra hurricane insurance.

Taking out hedge position is actually kind of anti-market timing. Because you are actually avoiding (to whatever degree you decide to take up) market swings when unexpected news are on its way. (Assuming most people's defintiion of timing the market is to try to buy low and sell high; here, we are actually trying to avoid the lows and highs).

Holding cash is one way; but it isn't available to everyone. For example, some people it's hard to hold sudden cash cheaply:tax, fees, loss dividends. early withdrawal penalties, etc. But fortunately, it is only 1 method, and there are many. This thread is to see what people are doing, if anything. Fed rates do move the market, historically speaking.

[sv2007]

I hedged BREXIT by shorting the S&P right before the vote. Market dropped, I sold the puts, made some money and then the market recovered. Had I not sold the puts right away, I'd be out the insurance money I paid.

Tom

I also hedged during brexit, and I can't believe the news that lots of people are surprised that they voted to leave because the polls has always indicated a very slim margin for staying.

I bought options on my very large holdings (not to make money, just to limit their drop); plus I sold GBP/USD as an insurance for my general holdings. I close the forex position pretty quick and made good money (not enough to compensate the losses initially, but I bought more shares and they've recovered well beyond the initial loss); I held the options a little longer so didn't make much (but the companies they covered also recovered, so it's all pretty good). If the vote was to stay, I'd be out some money, but that's insurance.

I didn't expect the brexit recovery to be so rapid; if I didn't hedge, it would have been ok too, in hindsight. Kind of like in hindsight, I only needed to buy house insurances for 1 year on 2 houses (I used to own many rentals by accident).

[clatoden99]

FED needs explain to us folks their meaning of inflation cause seems much higher than that BS they tell us.

[sv2007]

FED needs explain to us folks their meaning of inflation cause seems much higher than that BS they tell us.

The fed doesn't calculate inflation number, that task is done by bureau of labor statistics. The inflation is computed for different regions and employments, so there are many different numbers, and they also list the items used in calculations. I just happen to know this because I wrote a program needing their CPI stats.

I think the mystery with the fed is that they give hints leading up to the fomc meeting but sometimes the hints are cryptic. However, they do publish their reasons after the meeting, explaining why they did what they did (I think this is what you may be interested in).

For the individual investors (who has no professional helping him./her manage things) with significant $ in the US markets (and even housing), it is good to read up on these articles and follow the news so there are less surprises and perhaps take action to better regulate the risk profile (e.g. hedge, rebalance, etc.

[sv2007]

FED needs explain to us folks their meaning of inflation cause seems much higher than that BS they tell us.

You may find this interesting read on the last fomc meeting:

https://www.federalreserve.gov/monetarypolicy/fomcminutes20160727.htm

here's the quick and dirty:

https://www.federalreserve.gov/newsevents/press/monetary/20160727a1.htm

[frugal saver]

Just my opinion, but I don't think they'll do anything until after the election. And even then, if they do raise rates it will be another .25%

Hope I'm wrong, though.

[GoodSteward]

I've only recently had money tied into the stock market with a 401k, and a Roth. I have heard of hedge funds, but never really looked into it. Is someone willing to do a quick run down of this, or would I be better off googleing/wiki'ing this?

I love learning about this stuff