Portfolio Protection
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Matthew Buckley Check6-llc.com |
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8 years ago this morning I was awakened by a call from my mother-in-law on the east coast. As my wife spoke to her, I went to the closet to grab my new American Airlines uniform. My fist day of work as an airline pilot, I was scheduled to fly from Dallas/Fort Worth to Miami and then from Miami on to Cancun. I began to pack for my trip.
As I removed the plastic from my uniform, my wife came in and told me to turn on the television. She said an airplane had flown into the World Trade Center in New York. As I went through my mental aviation checklist of how an airplane could’ve flown into the tower on such a clear day I saw the second plane hit. I immediately knew we were under attack. I ran into the closet, tossed my airline uniform aside and reached for the familiar feel of my worn Navy flight suit. I ran out the door, nearly tripping on the untied laces of my combat boots. I raced out to Naval Air Station Fort Worth where I flew the F/A-18 Hornet for the naval reserve. The base was assuming a combat posture and the gates locked behind me.
I made it to my squadron, along with a fellow aviator, and we ordered our maintenance and weapons personnel to get 2 Hornets armed and ready to go. We ran next door to brief with an Air Force Reserve F-16 squadron and saw the Pentagon get hit on the screens in their command post. We knocked out a quick plan to stand up a combat air patrol for the southwest United States. That’s when it hit me: I went from flying in an airliner that day to possibly shooting one down. A once in a lifetime event.
Since I was one of the most junior pilots at American, I along with thousands of others in the industry, were furloughed the following week. “Furloughed” is airline lingo for laid off. In the blink of an eye I lost everything; my career, healthcare, and pension. When the markets finally reopened, I was wiped out.
Today we mourn the thousands we lost. Their deaths at the hands of people who wanted to kill more than they did serve as a reminder that we must remain ever vigilant. When you’re on top, someone is always going to try and knock you down. Expect and plan for it.
This day should also serve as a reminder that bad things happen and you need to be prepared. Whether it’s having an emergency fund, or protecting your portfolio, plan for the worst and be pleasantly surprised when it doesn’t come to pass.
It’s not a matter of if but when another attack will occur and intelligence sources predict it will be more spectacular than 9/11. My intent is not to scare you, but to direct you to be prepared, especially when it comes to your finances.
Utilize the numerous online tools that help you determine how much protection is required to hedge your portfolio, based on your appetite for downside risk. Let’s look at the Schaeffer’s Investment Research Portfolio Protection Analyzer.
Let’s say my portfolio is worth $100,000 and I’d like to protect myself against a 10% decline through November. The Analyzer recommends purchasing 4 S&P OEX 480 puts for $1,870 a piece, or a total of $7,480. The OEX is comprised of 100 leading U.S. stocks with exchange listed options. These companies are a good proxy for the overall market. If the market moves down 10%, you’d lose $10,000 in your portfolio. But the puts you purchased are now worth $11,140. Instead of losing $10,000, your portfolio actually makes money, totaling $101,140.40. And the bigger the drop (15% and greater) the more money those puts return. If the market drops 20%, your portfolio would be worth $110, 404.80.
While those around you panic, you capitalize on the downside move. Why doesn’t everyone protect their portfolio? It costs money. You spend $7,480 for this insurance. Many investors don’t want to spend the money, which makes no sense to me. We insure our homes, our cars, our lives, and our health, but many fail to insure our portfolio.
I personally sleep better at night knowing that I am safe if anything catastrophic happens. You might believe fighter pilots are risk takers but nothing could be further from the truth. We want to minimize all known risks before a mission so we have the maximum chance for success.
It’s not a matter of if you’re portfolio will take a hit, but when. Will you be prepared?
Matthew "Whiz" Buckley is the Managing Partner of Check6 LLC, a business-consulting firm specializing in leadership development, risk management, and strategic planning for Fortune 500 companies and related organizations. Whiz flew the F/A-18 Hornet for the U.S. Navy. He's a graduate of TOPGUN, has close to 400 carrier landings, and flew 44 combat sorties over Iraq. He transitioned to the business world after he was scheduled to fly his first flight as an airline pilot on 9/11. Instead, he ended up flying combat air patrol over the U.S. He rose rapidly though corporate America, starting as Managing Director of Strategy at PEAK6 Investments, to CEO of the Options News Network. He is an internationally recognized speaker and combined his unprecedented experiences in the military and corporate America in the writing of From Sea Level to C Level. You can follow Whiz on Twitter.