THE TRIPLE HEDGED STOCK PORTFOLIO

A man who we will call Sam who is middle aged wants to earn dividend income form stocks but he needs also to preserve capital due to the limited funds he has for retirement. But he is also willing to accept a fair amount of risk. He does not know much about bonds so he does not want to buy bonds directly. He does not want to own physical gold as he has no place to keep it safe. So he decides to invest primarily in stocks and closed-end funds that pay high dividends, e.g., 5% or higher, on the open market. The high dividends also tend to stabilize the price of the stock. He buys only stocks that are profitable and can sustain their dividend. Example stocks are MLP's (Master Limited Partnerships, e.g., oil and gas stocks), REIT's (Real Estate Trusts), and closed-end high income bond funds. He invests 70% in these stocks. He wants protection from deflation so he keeps 10% in cash (a hedge in deflationary periods, e.g., the Great Depression.) He puts 20% in gold mining stocks or gold stock funds, or other non-perishable commodity stocks, to protect against decline in the value of the dollar (inflation hedge.) He sells call options (covered calls) on his commodity stocks to hedge against a decline in gold or commodity prices. Now he is triple-hedged but still has dividends with some potential for capital gain. So we have the triple-hedged stock portfolio!