How To: Risk Reduction in Investments

Risk reducer is what I call a particular strategy that I use primarily with more conservative investors. The strategy utilizes a combination of high-yield bonds, calls on a market index core exchange traded fund, and bond fund puts. The concept behind the strategy is to provide full market upside potential exposure for the underlying security or index, while simultaneously dramatically reducing the potential losses of a market downturn. This is possible because the bond funds typically lose far less than the stock funds in a market downturn. Additionally, the put option contracts provide additional protection against downside losses in the bonds. Using this combination, we can provide an investor with dramatically lower market risk, while still preserving full upside potential to experience market gains.

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