Long Cash Portfolio Strategy
The Downside Hedge Long / Cash Portfolio Strategy relies on our core market indicators to allocate more money to stocks when market conditions are improving and raise cash when market conditions deteriorate.
I can’t see the future, therefore I hedge.
Our Long / Cash portfolio is designed for investors who don’t have access to options, shorting stocks, or ETFs that perform as a stock market short. Many 401k plans offer mutual funds and ETFs that are long stock or long bond funds, but don’t offer shorting or short ETFs. This strategy in an alternative to our Long / Short Hedging Strategy for investors that are restricted by their 401k or are simply uncomfortable with more aggressive hedging.
It can be used when an investor believes the market is at risk of substantial market declines.
Long Cash Strategy Performance
The Long Cash strategy has given slightly better than market performance without suffering catastrophic or unrecoverable losses. The chart above compares the performance of the S&P 500 to our Long Cash Portfolio strategies. The black line represents the value of $10,000 invested in the S&P 500 index. The dark green line represents our Long Cash strategy (simply using the S&P 500 Index and cash) and incorporates our market risk indicator. The light green line represents our Core Long Cash strategy which only recognizes our core market health indicators.
With our market risk indicator (dark green line) the strategy tends to hedge early so we miss almost all of any sustained market sell off. It has the disadvantage of being late in removing a 100% cash position so we miss much of the early part of rallies. It under performs in a rising market that is choppy or has a lot of small corrections similar to late 2004 to late 2006. It performs a tiny bit better than using just our core indicators in a “Risk On / Risk Off” environment as we experienced from 2010 to 2012.
Using just our core indicators to hedge (green line) we expose our portfolio to more volatility so we suffer more in the early stages of a down trend, but benefit more after market bottoms. It out performs the market in substantial declines and under performs the market in choppy up trends. It also has the tendency to generate whip saws on strong bear market rallies. During the 2000 to 2003 bear market our core Long Cash strategy got long 60% on the following dates 9/5/2000, 5/21/2001, 12/3/2001, 7/22/2002, 1/13/2003. Every one was very near the bear market rally top so we suffered losses during the beginning of the next leg down.