Portfolio Insurance

Portfolio insurance is a strategy used to reduce risk and protect stock portfolios against market declines. Portfolio insurance may entail short-selling stock index futures in a declining market, as opposed to selling the actual stock as it loses value. If the drop continues, an investor may repurchase the future at a lower price - using the profit to offset portfolio losses. Short-selling index futures as a form of portfolio insurance can offset any downturns, but could also hinder any gains. On the other hand, portfolio insurance may also entail purchasing futures in a rising market. Therefore, using portfolio insurance can be viewed as a hedging technique for a stock-only portfolio. Institutional investors often use portfolio insurance when they are dealing with a volatile or uncertain market. The ultimate goal of portfolio insurance is to prevent the value of a portfolio from dropping below a certain level. Of course, portfolio insurance is only effective if insured before the market declines.