As we explained in Taking Action, the purpose of a hedge is to cushion your portfolio against the risk of a significant market decline, not to eliminate this risk.
We live in a world of uncertainty. Although we expect US equities to suffer a meaningful correction in 2016, we’d probably retire to a private island if we could time the market’s highs and lows flawlessly.
However, establishing or adding to a hedge during periods of elevated market risk and liquidating that position after a significant decline in the broader market can improve your overall returns significantly and reduce your portfolio’s volatility in a bear market.
Selling your hedges for a gain also provides funds to invest in bargain-priced stocks.