| Your data only goes back 10 years. Mathematically, whether 70% up/down works out to beat the market depends on the period we're talking about. > I think you will find in just this example the market beats your portfolio by more than 1% here. This is just a simple example and I am being generous. When you look at real data you will not only find a similar pattern, but your portfolio gets absolutely crushed by the market. Here's a python script that generates random numbers to simulate the stock market. Each time you run it, you'll get a different result: http://pastebin.com/UNtDPjxd This is basically your "simple example" run many times side by side. Sometimes a hedged strategy works better; sometimes not. The place I got this idea in the first place was a book I read in college about the history of hedging as a strategy. It noted one of the earlier demonstrations of why it's a good strategy was when a fund showed that participating in 70% of the gains/70% of the losses of the S&P beat the S&P. But which years? This matters. Unfortunately, I can't find the book anywhere. IIRC, I think we'd be talking about a stretch covering the 40s, 50s, 60s. This is similar to how Milken pitched the junk bond -- it was originally based on a paper that showed a balanced portfolio of low rated bonds performs better than a balanced portfolio of high rated bonds (this is explained in Den Of Thieves). This was true back then because low credit ratings were so heavily discounted by market conditions (mainly, nobody wanted to buy them). > why isn't this a huge thing and everyone sells/changes their regular full market S&P 500 ETFs to do that? For the same reason that no one is pushing a diversified portfolio of junk bonds anymore; what worked in the past doesn't necessarily work in the future. |
Dave, Hacker News has some of the smartest commentary I found on a News site. Questions on here regularly have people answering them where that person has experience, worked in that field professionally and have studied those topics in school and have degrees in them.
I realize this is the internet, expectations are low. People troll. Even if you wanted to help, why not wait a minute before answering to see if someone more informed or more experienced, than a book read 10 years ago will have answer. It's more a courtesy to the person asking as they get a better answer, and it stops you from looking like an idiot. Win-win.