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Author: Rayvt Big gold star, 5000 posts Top Favorite Fools Top Recommended Fools Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 75613  
Subject: Re: Strategy comparison S&P500 vs. IUL Date: 4/3/2013 5:55 PM
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If you are "long" your home, and you buy homeowners insurance, you are placing a hedge.
Whaaat???? This makes no sense.

Wikipedia: "A hedge is an investment position intended to offset potential losses/gains that may be incurred by a companion investment."

Investopedia: "Definition of 'Hedge' Making an investment to reduce the risk of adverse price movements in an asset. Normally, a hedge consists of taking an offsetting position in a related security, such as a futures contract."

Homeowners insurance replaces your house if it burns down in a fire. It doesn't do anything to protect you from a decline in the value of your house.

I'm out of this particular subject. Your idea of what a hedge is is completely different from the actual definition of "investment hedge", so it's useless to discuss it.

How did a house and homeowners insurance get dragged into this thread, anyway. We are talking about investments, not homes.


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.

Ha! Then they'd better invest in the right vehicle(s) so that they actually accumulate that $1M, hadn't they? You can't just invest in any random "risk-free" way and assume that it'll get you to $1M. People (especially people with a particular agenda) try to believe that you can get high returns with low risk. You can't. Low risk comes with low returns. High returns come with high(ish) risk.

Here's an real-world example. Playing with my spreadsheet, Jan-75 to Dec-2012. Initial investment of $10,000, and adding $158/mo. The S&P500, with re-invested dividends, using the simple 10moSMA timing gate, grew to $1,000,000 by May-2010.

Big drawdown occurs, and it drops to $834,000 by Oct-2010 -- a HUGE 17% drawdown.

Meanwhile, the IUL-type floored/capped strategy had a value of $420,000.

Hmmm, what to do? Which to choose?
One the one hand, $834K after a big drop. On the other hand, $420K with no drops ever.
834 -- 420 ... 420 -- 834
Hard to choose, no?
Maybe I'll call my wife in and ask her which one she thinks is better.

===========
Dave, you keep using loaded words & phraseology. You keep calling a long position "naked". No normal investors term it that way. A long is a long. The only customary use of "naked" in investment parlance is a "naked short" position. And a naked short is pretty well known to be a high-risk position.
When you use "naked" to refer to a long position, you are trying to smuggle in the idea that it is a high-risk situation.

Ditto when you try to claim that homeowners insurance is a hedge. It may (or may not) be the way insurance agents think of fire insurance, but it is definitely not the way that "hedge" is used in investment terminology.

When you misuse words this way, you lower your credibility in eyes of people who know the field. Either you know that you are misusing the words -- and therefore are being dishonest. Or you *don't* realize that you are misusing the words -- and therefore are showing ignorance.
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