Using Option Strategies to Reduce the Risk in Your Portfolio

One of the main reasons we moved to Quintessence Wealth was because they could provide better tools for managing risk in our client portfolios.

Bonds & GICs

  • Most bonds and GICs currently yield less than 2%
  • A 2% return on a $1 million portfolio is only $20,000 per year
  • As we have discussed in previous blog posts, worldwide monetary conditions are forcing savers to take on more equity exposure, because they will not be able to meet their life income goals with bonds and GICs alone.

Equity markets

  • Stocks have performed well over the long term, but they come with greater volatility
  • In the US, the S&P 500 adopted 500 stocks into their index in 1957 – since then, markets were up in 46 and down in 17 of the years
  • Since 1957, there have been only 4 years when the S&P 500 Index dropped more than 15% in a year: 1973, 1974, 2002 and 2008.
  • Despite the fluctuations year to year, the average annual return for the S&P 500 Index since 1957 has been about 8% per year.

Ascertaining your investment time frame, your need for growth, and your risk tolerance level helps us determine the appropriate breakdown of investments in your portfolio.

Thinking outside the box

We believe equity markets should move higher in the long run. There may be smaller corrections from time to time, but most of the time it still makes sense to be invested. However, some portfolio “insurance” also makes sense. “Options” can provide some of this insurance.

How do options help? There are endless different options strategies, but we are interested in those that reduce risk: those that aren’t needed if markets go up but increase in value if markets go down.

For example, we recently acquired options for one of QW Elevate Enhanced Equity Pool’s US investments – it allows us to be invested in the markets if they go up, but protects the first 10% if markets drop in the last three months of 2019.

  • If the S&P 500 drops 15%, the net result would be a drop of about 5%
  • If the S&P 500 drops 10%, the net result would be no loss

There is no perfect investment that gives all the upside and none of the downside, but we can try to tilt the odds in our favour with options.

Through our ongoing efforts – like introducing the QW Elevate Enhanced Equity Pool to our models this summer and adding a layer of options this fall – we hope you see how our new firm enables us to deliver enhanced portfolios with solid upside potential and greater peace of mind.

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