Not protecting yourself

You buy motor insurance for your cars. That is mandatory by law.
You are wise and buy life insurance and medical insurance (If you don't, you should)
But what about investment insurance?

For most of our lives, things keep going along the same way they always do. Today is much like yesterday and tommorrow will be most like today. And we believe that the future will be like the past.

But there comes a time when the world changes upon us, at least in the investing world. The future is hardly like the past.

When such incidences occur, past experiences do not count. Asset prices crash and crash hard. A collosal amount of wealth is lost. This has happened in the past and will continue to happen in the future...one such time is now. A massive wealth destruction has occured in the almost all asset markets, especially in the stock markets.

While we are never able to predict such events, their timing or their magnitude. But we can stay awake to the possibility of such events occuring...and have a plan to protect our wealth when they do occur.

Else, paper gains do not take time to erode into huge losses...and into horror stories.

Look at the kind of damage many bluechip stocks (all are Nifty 50 stocks) have had over this year from their highs, and especially this month (data as on 23 Oct 2008 market closing):


Stock---------Fall
ABB Ltd.------64%
BHEL---------59%
Bharti---------45%
DLF-----------78%
Grasim--------70%
Hindalco-------71%
ICICI Bank----75%
Idea-----------74%
Infosys--------46%
L&T-----------63%
Ranbaxy------62%
Rel Comm-----72%
Rel Infra------83%
Rel Petro------67%
SAIL----------71%
Siemens-------73%
Sterlite--------78%
Suzlon---------83%
Tata Motors---78%
Tata Steel-----78%
TCS-----------59%
Unitech-------89%

And falling....

Not to mention many smaller companies that have seen greater damage.

Clearly, the need to protect your investment is never more clear than in the current environment. Of course, protection should have been deployed much earlier.

Wise investors manage risk and protect themselves when things go bad. There are many ways to minimise losses. One is to risk small. The other is to stay out of large downtrends (recognise it first naturally) by either staying with cash or using derivatives as hedges.

Regardless of which method an investor chooses to use, every investor should learn how to protect his/her portfolio...and learn not to live in hope and blind optimism.