Insurance - can play a larger role in portfolios

The reality is we seem to be in an environment where macro influences are more dominant than they have been over the last few decades. This may be because the debt super cycle is undergoing a turning point in developed markets, using the language of Bridgewater associates. As a result, we should consider having an insurance policy that protects against the negative influence of a change in the debt super cycle, the monetory cycle, or changes in productivity. These can influence the earnings of companies over different timing cycles. We can insure against these changing trends by studying how different assets move in these changing cycles. A percentage of the portfolio can then be allocated to insurance, say 5%. Using cheap insurance in securities that have a quasi correlation with a certain event occurring that may result in the equities generating negative returns - this is our offsetting element. Since we wish to deploy only 5% of the portfolio to such securities, we need to have embedded leverage, hence the usage of derivatives such as options. We pay a price to have protection against an extreme event by buying a call or put option on a certain underlying for a period of time (in general we want this product to have a similar time length as the underlying securities we have invested in).