Hedging your bets in hard times
TEXT OF COMMENTARY
Kai Ryssdal: Whether it’s the kind the FDIC offers or the kind we all buy on our cars and houses, insurance is essentially a hedge. Paying for the peace of mind of knowing you’re covered if something goes wrong. Hedging’s one of those terms that’s bandied around a lot by financial types. But commentator Megan McArdle says more of us ought to do it in the more mundane parts of our lives.
Megan McArdle: Times are a little tough these days. Most of us are feeling, in Tom Lehrer’s words, a little bit like a Christian Scientist with appendicitis. So why not do what the big financial boys do — hedge your bets? This technique is widely exploited in the financial world, but people rarely think to apply it to themselves.
When I was getting my MBA, people put a lot of stock in getting a full time offer from their summer internship. Toward the end of the summer, a few of us decided to hedge our net psychic wealth. We each put $75 into a pool. Those who got full-time offers lost their money, but gained a job. The people who didn’t get offers got to divide the money.
Merrill Lynch didn’t offer me a full time job, but I did get a lavish dinner at one of Chicago’s best restaurants. I enjoyed the meal much more than I would have enjoyed working at Merrill Lynch.
There are lots of opportunities to do this in every day life. Start with your 401K. You’ve probably got a lot of company stock in it. This is exactly the wrong approach. Instead, you should buy stocks that do well when your company does badly. If you work at Nutrisystem, buy shares in Krispy Kreme. If you’re an automotive engineer, short GM and invest the proceeds in Exxon Mobil securities.
The Case-Shiller housing index offers a similar opportunity. If you’re saving up a downpayment, you can buy shares in your local index, which will pay off when prices rise. But if all your wealth is concentrated in your home, you should be able to short housing futures. If prices keep falling, you’ll reap a profit.
Worried about the outcome of a major event — a promotion, a house sale, even a marriage proposal? Why not find a few willing friends and bet against yourself?
This strategy offers a bonus well beyond mental peace–you may find out that your friends have a lot more confidence in you than you have in yourself.
RYSSDAL: Megan McArdle is associate editor at The Atlantic. She blogs there too.
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