Why You Shouldn’t Be Afraid Of Options And Futures

Buy-and-hold is the standard investment advice for rookies. They tell young people to grit their teeth through bear markets like those of 2001 and 2008 where some investors lost half their savings. They say you will eventually make back your losses over time if you stay in the market. They call that “diversification across time.” They suggest old folks like me should have most of our money in good bonds because we don’t have the time left to make up for losses, but we can’t do that because the Fed has forced interest rates to near zero for almost a decade.

One reason that diversification across time is a bad idea for young people is simple math. If a market crash takes half your life savings, the market will have to double in order to make up your losses. That may take five years, but then you’re only back where you started and have missed five years of potential gains. The math looks bad.

Few investors would buy a $300,000 house and not buy insurance on it against fire, flood, tornados or hurricanes. A few more might go without insurance on a $100,000 BMW, but not many. Consider that the odds of a bear market in stocks that steals say 25% of your savings are far greater than your house burning down or totaling your BMW. Bear markets happen every decade. So why not insure your investment in the stock market as you would your house or car?