Insuring Your Portfolio

“I have a lot of money. The problem is, my money makes noise.”
— Anonymous

George Fescos: “If I owned, for example, a $200,000 home and did not insure it you would say I was mad. Yet, if I owned, for example, a $200,000 portfolio of stocks and did not insure it (with put options or by selling calls) I might even be called prudent. Why is this?”

Could it be because a house that catches fire can easily be worth zero, while an even vaguely sensible portfolio of stocks cannot go to zero?

The way to “insure” a portfolio of stocks is generally through diversification, sensible buying (not joining a mania at the top), dollar cost averaging (investing periodically, so you wind up buying more shares when prices are down and fewer when prices are up), avoiding margin (margin loans are at record levels these days, way up from last year), not investing money you might need when prices are low (as I’ve written elsewhere, those who invest when they get a bonus and sell when the roof needs to be repaired are entrusting their investment decisions to their roofs), and patience. Over the long run, stocks should recover from losses. Charred houses, on the other hand, do not rebuild themselves.

The problem with insuring a portfolio with options is that options are a less-than-zero sum game, with the “house” taking commissions and spreads. And the riskier the stocks, the more expensive the options. (Which may seem nice when you’re writing the options, because you get a bigger premium . . . but what good is a juicy $30 premium on a $160 stock if the stock goes down to $75 by the time the option expires?)

The odds with homeowners insurance are also stacked against you — the insurers do not set their prices to pay out more in claims than they take in in premiums — but the mortgagee will require insurance (heck, it’s not their money). And even if you are mortgage-free, you will probably want coverage. Only the truly rich can afford not to insure their homes. (And even then, they would want some form of liability coverage, lest the butler be shot by the gardener, and YOU be sued for $20 million for your role in hiring, and perhaps arming, the gardener.)

The one place you can save some money, over the long run, is in opting for the highest deductibles you can afford. I.e., forgoing the insurance you don’t absolutely need.

[For those puzzled by the opening quote of this column — which, characteristic of my steely stylistic discipline bears no relation to the rest of the column — I would just point out this irony: Namely, that noisy money used to be the valuable money, while paper money, silent in your pocket, suffered frequent bouts of worthlessness. Today, “silver” coins aren’t even silver — and wouldn’t be worth much if they were. Indeed, today the only thing more valuable than silent money, or cyber money, is frequent flier miles. One day, the power of the Fed to inflate and deflate the currency will be rivaled by the power of American Airlines to raise or lower the cost of an upgrade.]