Bond and Stock Hedges

03/19/2004 12:00 am EST

Focus:

John Mugarian

Editor, Investor Alert

"Trees don’t grow to the sky; I expect an election-year correction," says John Mugarian, editor of the recently-launched Investor Alert. "But rather than be scared out of our long-term positions, I’ve found the perfect hedges to protect our stock and bond portfolios."

"Since I’m not bearish on the stock market long term, I have no interest in selling our quality stocks because of a possible correction. I believe the correction will be short-lived and last no longer than the early spring. That being said, I would rather hedge a portion of our portfolios to reduce risk and lessen anxieties. Having a hedge in place will make any correction tolerable, allowing you to think clearly and buy when bargains appear. My first portfolio protector is the Rydex Tempest 500 Fund (RYTPX), a mutual fund that tries to do the daily opposite of the S&P 500 by twofold. In other words, if the S&P goes down by 10%, the fund should increase by 20%. The fund uses leveraged vehicles such as futures and options contracts to enhance performance, so be prepared for some volatility.

"Are fear of higher rates keeping you up at night? No worries, mates. I’ve found the perfect weapon in our war against potentially higher interest rates. More than likely, rate hikes from the Fed will not come until after the November election. But since rates are still at or near historic lows, it only makes sense to position ourselves for what seems the inevitable: a bear market for bonds.My top hedge for bond investors is the ProFunds Rising Rate Opportunity Fund (RRPIX), which is selling at the low end of its trading range. This is a mutual fund that seeks to return results that inversely (opposite) correspond to 125% of the daily price of the 30-year Treasury (long bond). In other words, if interest rates on the 30-year Treasury rise, and bond prices fall, the ProFunds Rising Rate Opportunity Fund will gain in value."

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