[Real Investment Strategies] "How Long Will the Rally Last?"... Insurance Is Needed During Stock Market Surges

Markets Continue to Soar Despite External Uncertainties
Entering a Phase of Volatility Management
Portfolio Restructuring: Increase Safe Assets and Cash Holdings
Leverage in Insurance-Type Products Is Not Advisable

As both the domestic and US stock markets continue to rise without significant corrections, concerns about a potential adjustment are growing. Given the persistent uncertainty stemming from US tariff policies and ongoing worries about inflationary pressures, experts advise that investors should rebalance their portfolios, including diversifying for risk hedging purposes.

Markets Reach New Highs Despite Unstable Conditions

According to the Korea Securities Depository's securities information portal, as of July 28 this year, the overseas stock most heavily purchased by domestic investors was the 'Direxion Tesla 2x Exchange-Traded Fund (ETF)'. Investors bought a total of $2.2512 billion (approximately KRW 3.1342 trillion), making it the overwhelming number one. Tesla ranked second with $1.84472 billion in net purchases. Other top picks included ▲SCHD (a leading US dividend growth ETF) at $725.97 million, ▲Circle (a US stablecoin issuer) at $653.31 million, and ▲SPLR (Vanguard's S&P 500 index-tracking ETF) at $473.57 million. Except for SCHD, all are stocks targeted for rapid growth. Big tech-related stocks such as Google, Palantir, and Meta also ranked high on the list.

This trend is interpreted as investors betting on the growth of US companies, despite concerns over unstable tariff policies. In fact, the S&P 500 and Nasdaq indices have been repeatedly hitting record highs, reflecting investor optimism. The tech-heavy Nasdaq index, which hit a yearly low of 15,267.91 on April 8 following the shock from Chinese AI company DeepSeek, surged to an all-time high of 21,178.58 as of the previous day. This marks a 38.7% increase in about four months.

Elevated Valuations... Time to Manage Volatility

As the sharp upward trend continues, concerns about overheating are also mounting. While the US and major countries have reached tariff agreements, alleviating trade uncertainty, there are still worries about a rebound in inflation indicators and a slowdown in earnings growth. With both overvaluation concerns and trade policy risks present, analysts suggest that maintaining a neutral allocation is a rational approach. Kim Insik, a researcher at IBK Investment & Securities, explained, "Since risk assets are already highly priced, instead of increasing allocations, it is necessary to adjust specific assets to prepare for volatility."

The domestic stock market is also seen as entering a phase of cautious observation. Although pro-market government policies such as the amendment of the Commercial Act to impose shareholder loyalty duties on directors and the separate taxation of dividend income, as well as the rebound based on strong second-quarter GDP, are expected to continue, the rapid increase in leveraged trading calls for caution against overheating. According to the Korea Financial Investment Association, the outstanding balance of margin loans, commonly referred to as 'debt investment' funds, has risen from KRW 15 trillion at the beginning of the year to KRW 21 trillion this month, an increase of more than 30%.

Portfolio Restructuring Needed: Increase Safe Assets and Cash Holdings

There are growing calls for investors to adjust their portfolios by increasing allocations to safe assets or cash. Adjusting the ratio of stocks to bonds and utilizing various hedging instruments can be effective strategies.

Products such as the Volatility Index (VIX), which rises when stock prices fluctuate, are representative examples. The VIX, listed on the Chicago Board Options Exchange (CBOE), reflects the market's expectations for volatility in S&P 500 index options over the next 30 days. In essence, it is a product that forecasts future volatility in the S&P 500. The S&P index and the VIX often move in opposite directions, which is why the VIX is also called the 'fear index.'

The difference from index inverse products is that the VIX responds to both upward and downward movements in stock prices. While inverse products rise only when stock prices fall, the VIX responds whenever there is a sharp move in either direction. Generally, a VIX level above 30 is considered a 'fear zone,' and above 60, a 'panic zone.' This indicates that investor anxiety has reached levels that could paralyze the market. The VIX, which climbed to 52.33 in April, fell to 15.03 as of July 28.

Insurance, Not Gambling: Caution Needed with Leveraged Hedges

Other traditional safe assets such as government bond ETFs, cash, or gold can also serve as hedging portfolios. However, there are concerns about seeking leverage effects even in hedging products. Products that track the VIX or index inverses at twice the rate could become another form of gambling rather than risk avoidance.

An official from the financial investment industry warned, "Taking on additional risk with safe assets is an area for professional investors, not for the general public to use as a hedge. Hedging, by definition, is a form of insurance to avoid risk, so taking on additional risks here is an illogical investment."