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Sell in May? Or Hedge ’til Labor day!

Richard Croft
April 28, 2014
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There is an old adage in the investment industry; “sell in May and go away ‘til labor day.” Not everyone agrees… Warren Buffett for example! Still, enough investors believe in the concept, and when you think about it there is rationale underpinning the theory. Summer holidays can limit liquidity and often there is little news to encourage significant moves.

Of course, this time could be very different with political issues potentially altering the landscape, unrest in Ukraine being front and center! With the Russian military amassing along the Ukraine border and US sanctions not likely to weigh on any decision Putin may make, this situation could escalate quickly. In a worst case scenario, all bets are off.

Ukraine’s GDP ranks 37th in the world, according to the World Bank, and is about 1% of US GDP. In other words, not significant in terms of world output. The real concern is that military action in the Ukraine spills over into Europe. That’s not a major concern, but with instantaneous reporting it could spook the financial markets. Certainly, if we see any major move in North American markets I would expect it to be to the downside.

With that in mind, there are a couple of things to think about. Assuming you want to stay invested through the summer months, you might think about hedging your bets with puts. Index put options are cheap based on the implied volatility as seen in the VIXC (i.e. the Canadian Volatility Index). The iShares S&P TSX 60 Index Fund (Symbol: XIU, Friday’s close $20.87) Sept 20 puts could be purchased at 35 cents.

You could also look at options on the iShares S&P 500 Index ETF (XSP, $21.46) Sept 21 puts at 70 cents. This particular ETF is hedged to the Canadian dollar, which may not be particularly helpful should US stocks tumble. In that scenario, I would not be surprised to see the US dollar rise in value, which would be hedged away in this ETF.

Richard Croft
Richard Croft http://www.croftgroup.com/

President, CIO & Portfolio Manager

Croft Financial Group

Richard Croft has been in the securities business since 1975. Since February 1993, Mr. Croft has been licensed as an investment counselor/portfolio manager, operating under the corporate name R. N. Croft Financial Group Inc. Richard has written extensively on utilizing individual stocks, mutual funds and exchangetraded funds within a portfolio model. His work includes nine books and thousands of articles and commentaries for Canada’s largest media channels. In 1998, Richard co‐developed three FPX Indexes geared to average Canadian investors for the National Post. In 2004, he extended that concept to include three RealWorld portfolio indexes, which demonstrate the performance of the FPX portfolio indexes adjusted for real-world costs. He also developed two option writing indexes for the Montreal Exchange, and developed the FundLine methodology, which is a graphic interpretation of portfolio diversification. Richard has also developed a Manager Value Added Index for rating the performance of fund managers on a risk adjusted basis relative to a benchmark. And In 1999, he co-developed a portfolio management system for Charles Schwab Canada. As global portfolio manager who focuses on risk-adjusted performance. Richard believes that performance is not just about return, it is about how that return was achieved.

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