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Planner: Talking about volatility hedging

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Depending on your client’s investment objectives, risk tolerance and timeline, hedging against volatility may be a good strategy. And rents from commercial or residential real estate holdings can help a client focus on something other than the equity portfolio.

Here are some points to raise:

  • How much of a drop in your portfolio’s current value are you emotionally capable of accepting? Volatility means the value is fluctuating, and some people are more bothered by temporary drops than others.
  • How much of a drop would make you worry about your portfolio as you go about your daily routine? If, for example, a 5% drop will put you on edge you should consider incorporating a volatility hedge, even if your asset base is large and you have a long time horizon.
  • Just because steeper drops don’t bother you, doesn’t mean you don’t need a hedge. Some people can do without a hedge on an emotional level, but their portfolios need protection from major market swings.
  • If you’re approaching retirement, a volatility hedge may be appropriate – it’s difficult to recover from a market downturn when you don’t have time left to accumulate assets; and when the portfolio is about to shrink due to income withdrawals.
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