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Author: Dwdonhoff Big gold star, 5000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 75381  
Subject: Re: Strategy comparison S&P500 vs. IUL Date: 4/3/2013 12:55 PM
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Hi Murray,

Is it just me, or is Dwdonhoff changing his argument after presented with real world returns?
Its just you. I haven't changed anything.

Your question is unanswerable with the information given. Are we talking about a married couple? Two incomes? Job risk? Total assets?
Right off the bat, I stated "$100k liquid net worth."

After that, the situation is different for everyone... however I explicitly asked Ray his personal discretion were he to have that net worth.
==============

Ray,

1) "unhedged-long" -- Implies that there is such a thing as a hedged long position. There isn't.
Of course there is, and *YOU* just defined one 2 sentences earlier. If you are "long" your home, and you buy homeowners insurance, you are placing a hedge.

A "hedged long" position is effectively just a smaller position.
Not in direct proportion, no. You can go long $100,000, and hedge against loss up to 100% without selloing 100% for significantly less than $100,000.

A naked long is strictly a bet on price without time considerations. A hedge is often a bet including time considerations.

If you buy a $100,000 home, and "lose" $250 a year by hedging with hazard insurance, you are doing so because if a fire (drawdown) wipes out your equity you don't want to live in a tent in the park while you wait out the time to manually rebuild your home without external financial support. Yes, you are still "losing" your $250 a year, every year that the insurance hedge is not needed... but the year it is needed the payoff from the hedge *INCREASES* your net position, not decreases.

A hedge is only necessary for the assets you can't afford to lose, during the TIME FRAME that you cannot aford to lose them.

Bill Gates doesn't need to buy fire insurance on a $100,000 property (assuming he would ever bother owning one.) If the property scorched, he wouldn't even notice the cost to rebuild on his balance sheet.

If an investor needs $1,000,000 accumulated equity by age 65 to fund their retirment lifestyle, and they are in a market environment with historical drawdowns of 50%, they can't afford to go naked until they have at least $2MM accumulated.

Our comparison exercise is not in regards to a speculative trading account, its in regards to the OP's inquiry about retirement account management. Accounting for the expectable market behaviour within the last 5-10 years prior to drawdown is critical to the results.


I'll cover more later... have an appointment in minutes... chau!
Dave Donhoff
Leverage Planner
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