Lock Down Those Gains

 | Dec 16, 2012 | 12:00 PM EST
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You're glad you have insurance on your car if an accident happens, and you're grateful to have it if a big storm hits. Of course, paying for the insurance is often agonizing or annoying, as we know we are likely throwing money out the window. But how else can you protect yourself from the dangers of the unknown?

As it pertains to the market, insurance for your portfolio is also important -- and if someone is willing to take the other side of a trade or position here, and the price is right, why not take advantage?

The market is at a point at which it would be cheap to buy insurance against a disaster and, as we head into the end of the year and potentially severe volatility, it's reasonable to assume that protecting gains would be a smart move. The S&P 500 is up a robust 14% so far in 2012, and I suspect many money managers are behind it all.

I've been there, trying to hustle for some return in the last few weeks so I'd be able to exceed my bogey. My incentive came not only from that, but also from the prospect of client assessments. If I didn't meet a stated objective, I was at risk to lose assets -- which was more painful than missing my performance bonus. So I suspect we'll see money roaring after some particular names in the last couple of weeks of the year.

I've also been on the other side of these matters. Back in the 1990s, I was managing a very large pension fund with a slew of great managers, and those under me would also be tempted by the desire to outperform. I cautioned about being too "cute" or aggressive, warning them that their future with our fund depended on them not doing anything stupid. Most got the message. Not only was it in my best interest to guide my own performance into the end of the year, but it helped me to assist my various managers in achieving their objectives.

When folks were beating their goals, it was best for them to put down their positions or just hedge their portfolios to market-neutral, at least until the end of the year. I advised them, "Lock in what you have and cruise into year-end." Most took my advice and made it pay off. It was also a time to shed the "dogs" of the portfolios, dismiss the names that were dragging performance,  build up an arsenal of cash and be more than ready to start fresh in the new year. 

So buy some insurance. There's nothing wrong with protecting what you have worked all year to achieve -- and, these days, puts are cheap. In fact, you won't often find such an opportunity to insure your gains so cheaply, and it would only be for a few weeks.

This is a tough game, and honors only go to the ones who put up the numbers through the end of the year, not 98% of the way. After all, a bird in hand is better than two in the bush.

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