Summary
- In June, I presented a bulletproof, or hedged, portfolio around a position in Johnson & Johnson.
- This portfolio was designed to last six months. Here, I show how it has performed at its halfway point.
- So far, this portfolio is down 2.45%, underperforming SPY, but outperforming Johnson & Johnson and its other unhedged components.
- Looking for a helping hand in the market? Members of Bulletproof Investing get exclusive ideas and guidance to navigate any climate. Get started today »
JNJ celebrates the 75th anniversary of its IPO (photo via JNJ's Twitter account).
A Hedged Portfolio Around A JNJ Position
In August of 2018, I wrote about the performance of a bulletproof, or hedged, portfolio built around a position in AT&T (T) in 2017 and presented a new one, which completed in February (each portfolio lasts for six months). Following that, I began presenting hedged portfolios built around other stocks, including Johnson & Johnson (JNJ) in June. Let's see how our JNJ portfolio is doing three months in, given the performance of the stock and the market, in general, since then. First, a reminder of how the portfolio was constructed and what it consisted of.
Constructing The June JNJ Hedged Portfolio
We used the Hedged Portfolio Method to build a concentrated portfolio around JNJ in June, starting with these premises:
- You had $500,000 to invest.
- You were unwilling to risk a drawdown of more than 16% during the next six months, so you wanted to be hedged against any decline greater than that.
- You wanted to invest in a handful of names, including JNJ, with a goal of maximizing your expected total return net of hedging costs.
These were the steps involved for those who wanted to do this manually (your returns would obviously have varied based on which approach you used).
Step 1: Estimate Potential Returns
The goal of this step was to find names that had the potential to generate high total returns to include alongside JNJ. My site calculates its own potential returns by analyzing adjusted price history (which takes into account dividends) and options market sentiment, but you could have derived yours from Wall Street price targets or the price targets given by Seeking Alpha contributors you follow. Your initial universe could have been as big as Portfolio Armor's (the ~4,500 stocks and exchange-traded products with options traded on them in the U.S.) or something smaller, such as the Dow 30.
Step 2: Calculate Hedging Costs
Since you were going to hedge, gross potential returns were less important to you than potential returns net of hedging costs. To figure those out, you needed to figure out the optimal, or least expensive, way to hedge each name. We wrote about how to find optimal hedges here. For this example, you would have been looking for the cost of hedging against declines of 20% or greater. The lower the decline you were looking to hedge against, the narrower the list of names you would have been able to use.
Step 3: Rank Names By Net Potential Return
For each of the names in your initial universe that had a positive potential return, you would have subtracted the hedging cost you calculated in Step 2 to get a net potential return.
