Assume for a moment that you must pick one of two investment portfolios. The first one is a buy and hold approach, 100% stocks. The second portfolio gets 50% of the upside and 50% of the downside. Which would you pick? For the 2nd approach, the initial investment of $1,000 declined to $764 in less than two years. With half of the market’s gains, your portfolio climbed to $1,152 five years later. Then, applying just half of the subsequent market decline, your gain sank to a loss of $825. However, while the market found its bottom below its 2002 trough, your portfolio is nicely above its previous dip. Then, with just half of the market’s gains over the past 11 years, your portfolio again advances to new highs. Over the secular bear cycle-to-date, the market is up 120%, compounding at a modest 4.0% annually. Yet the 2nd approach portfolio is up 138%, providing almost 1.2 times the cumulative gain. The benefit of the hedged portfolio in secular bear markets is because of the disproportionate impact of losses relative to the gains required to recover losses. Most significantly, as the magnitude of the loss increases, the required recovery gain exponentially increases. This is why it’s an advantage to hedge against large losses beyond 11-15%.