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Tail-Risk Management for Retirement Investments

Vineer Bhansali
The Journal of Retirement Winter 2015, 2 (3) 78-86; DOI: https://doi.org/10.3905/jor.2015.2.3.078
Vineer Bhansali
is a managing director at PIMCO in Newport Beach, CA.
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  • For correspondence: bhansali@pimco.com
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Abstract

One of the insights of behavioral finance is the tendency for small investors to overreact to market swings. Even a well-structured portfolio may be vulnerable to panic selling in a downturn. The article explains how a policy of tail-risk hedging could deter such behavior by putting a floor on drops in the portfolio. Instead of maintaining an overly conservative stance and an unnecessarily low share of equities, investors could hedge their portfolios by relying on options, which have become a much more feasible tool for the small investor in recent years. The article discusses the relationship between the time to retirement and the need to hedge. Investors nearing retirement have to adopt a more defensive position or hedge explicitly, but younger investors can be more aggressive and buy options with lower strike prices.

TOPICS: Retirement, derivatives

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The Journal of Retirement: 2 (3)
The Journal of Retirement
Vol. 2, Issue 3
Winter 2015
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Tail-Risk Management for Retirement Investments
Vineer Bhansali
The Journal of Retirement Jan 2015, 2 (3) 78-86; DOI: 10.3905/jor.2015.2.3.078

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Tail-Risk Management for Retirement Investments
Vineer Bhansali
The Journal of Retirement Jan 2015, 2 (3) 78-86; DOI: 10.3905/jor.2015.2.3.078
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  • Article
    • Abstract
    • BEHAVIORAL BIASES AND INVESTMENT RESPONSES
    • MANAGING DRAWDOWN RISK
    • EVALUATING THE TRADE-OFFS OF TAIL-RISK HEDGING
    • CONCLUSION
    • ENDNOTES
    • REFERENCES
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