portfolio insurance

Here is the surprising part. Portfolio insurance does not involve an insurance company at all, no premium paid to anyone sitting behind a desk with a calculator. It is really a plan for buying and selling your own shares in a disciplined way so that if the market falls hard, your losses are cushioned, and if it rises, you still get to enjoy some of the gain.

Think of it less like a life insurance policy and more like a seatbelt you fit yourself. The most common version uses options. You hold shares in, say, Dangote Cement or MTN Nigeria, and you also buy a put option, which gives you the right to sell those shares at a fixed price even if the market crashes below it. That fixed price acts like a floor under your feet.

There is another version that uses no options at all, just rules. It is called dynamic hedging. As prices fall, you sell a bit more of your stock and move into safer assets like treasury bills. As prices rise, you buy back in. It sounds sensible until you remember that everyone using this method tends to sell at the same time during a crash, which can actually make the crash worse. This is part of what happened during the 1987 Wall Street crash, when portfolio insurance strategies amplified the very fall they were meant to guard against.

For a Nigerian investor with shares on the NGX, or someone in London holding a mix of FTSE stocks, portfolio insurance is less about a product you buy off a shelf and more about a habit of protecting downside while still staying invested. A relative abroad sending money home to buy shares for a child's future might use a simpler version, just deciding in advance the price at which they will cut losses, rather than watching the market daily with anxiety.