Investing

Can I bay an insurance for stocks/ETFs?

  • Last Updated:
  • Oct 17th, 2020 8:06 am
[OP]
Jr. Member
Nov 27, 2019
157 posts
119 upvotes

Can I bay an insurance for stocks/ETFs?

Here is the thing. I’m invested 100% and do not plan to sell anything anytime soon. But, I would like to consider buying some kind of insurance/protection against a potential market crash. Is it possible? Does anyone have similar thoughts or some experience with it?
10 replies
Deal Addict
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May 11, 2014
4103 posts
4434 upvotes
Iqaluit, NU
Market-linked GIC cannot lose money, but often dont make money. The crash has to occur first in general for them to be worthwhile at all.
Segregated Funds ensure 75% or 100% of contributions on death. But you have to die first.

The above are generally terrible options, and expensive.

You could utilize puts, but you need to understand options and be able to buy a contract at a reasonable price.

For the everyday person, sounds like you could be overinvested.

The cost of all these options are/can be prohibitively expensive. You are likely approaching your situation in the wrong way.
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[OP]
Jr. Member
Nov 27, 2019
157 posts
119 upvotes
xgbsSS wrote: Market-linked GIC cannot lose money, but often dont make money. The crash has to occur first in general for them to be worthwhile at all.
Segregated Funds ensure 75% or 100% of contributions on death. But you have to die first.

The above are generally terrible options, and expensive.

You could utilize puts, but you need to understand options and be able to buy a contract at a reasonable price.

For the everyday person, sounds like you could be overinvested.

The cost of all these options are/can be prohibitively expensive. You are likely approaching your situation in the wrong way.
Thank you for the opinion. So, do you know how much expensive would it be insurance to protect 1M portfolio in case of decrease over 20%?
Deal Addict
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Aug 4, 2014
2757 posts
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Toronto, ON
Step Two. Shop for the best GIC rate for the term you choose. For example, a 5-year GIC pays 4.35%.
Riiiight.. 🤪

Id recommend Step 0: increase your “emergency” fund. I’ve avoided changing HISAs in a few years, but 1.2% at Alterna (they’ve been lowering the rate every other month since March) fell even below 1.5% at People’s Trust (our original “alternative” eSavings account) so will try to catch Canadian Tire’s 1.8% for as long as it lasts.. sigh
[OP]
Jr. Member
Nov 27, 2019
157 posts
119 upvotes
freilona wrote: Riiiight.. 🤪

Id recommend Step 0: increase your “emergency” fund. I’ve avoided changing HISAs in a few years, but 1.2% at Alterna (they’ve been lowering the rate every other month since March) fell even below 1.5% at People’s Trust (our original “alternative” eSavings account) so will try to catch Canadian Tire’s 1.8% for as long as it lasts.. sigh
Absolutely. Cash is king in short squeeze that will most likely occur in 2021. It’s our additional strategy as we expect a lot of great buying opportunity ahead (not just in a stock market). Due to that, we decided to stop invest additional money in stocks and pile up a cash. We also have a meeting in a bank tomorrow. Will tray to get approved for another LOC (already have one unused with an other bank) and I’ll ask for available ways, if any, to get some cash based on our portfolio (and other assets) if we need it.

Regarding my insurance question, I was simply thinking... if you can buy insurance for a house, car or whatever, could you buy insurance for a stock investment in case it decline e.g. more then 20%. Is there such option at all on insurance market and if there is, how much would it cost for let’s say 1 year.
Deal Addict
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Oct 14, 2015
1190 posts
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Perhaps I don't understand what you mean by "insurance", but some people just buy an equity bear ETF such as (HDGE) RANGER EQUITY BEAR ETF

During the Feb - March crash, S&P500 dropped 34% while HDGE gained 46%.

Click to enlarge:


HDGE.png
Member
May 2, 2019
359 posts
345 upvotes
Vancouver
florenntina wrote: do you know how much expensive would it be insurance to protect 1M portfolio in case of decrease over 20%?
About $50,000 for 1 year, assuming S&P 500 index. Too expensive, I'd say. You'd basically forfeit all your expected profit from the portfolio. Note that kind of "insurance" does not protect you from a 19.9% or smaller decline; the market can be going 1% down every month for years, and you'd never be paid on the "policy".

I estimated the number from the quotes on futures options, in this case a put option on 2900 S&P level with the expiry on Sep 17, 2021, the latest available. The last price was 144.80 (bid 137.75, ask 159.25) - that's 4-4.5% of the current S&P level. So it would be about 5% for the whole year. If you buy that option, you can be paid if you exercise it any time S&P is under 2900 but not later than Sep 17, 2021.

There are different financial instruments with a similar effect, e.g. LEAPS puts. Prices should be very similar.
[OP]
Jr. Member
Nov 27, 2019
157 posts
119 upvotes
Thank you all for the answers, especially @ yvrbankerThumbs Up Sign
Jr. Member
Nov 17, 2016
149 posts
92 upvotes
There used to be an insurance company called AIG that tried to insure debt instruments. They issued credit default swaps on corporate and collateralized debt but as soon as the 2008 crisis happened they were unable to pay and had to get bailed out.

Back then insurance cost about 1/7th of interest. Today we have dynamically priced put options which are are priced by the market and the volatility index but are much more secure because they do not have the same counter party risk as credit default insurance did on debt.

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