So for those truly skeptical people, I propose a simple experiment that will show you how powerful this technique is, while
insuring against major loss.
An insurance policy designed to provide additional
coverage against major losses covered under the original policy if existing liability claim payments are exhausted past their limits.
Spreading your investments into different asset classes, industries, countries and even currencies will help
guard against a major loss.
In other words, because a bond fund spreads investors» investment over a number of different bonds, investors are more
insulated against major losses than they would be if they invested in the bonds themselves.
The policy value will depend on how much you pay and how well the market index performs, and while there are some caps on how much you can earn, you are
protected against major losses in a way you wouldn't be if you invested in those markets yourself.
It allows investors to make a little money on the premiums while protecting
them against major losses.
A hedge, then, is similar to an insurance policy, insuring
you against any major losses regardless of which way the market moves.