Portfolio insurance: the crash protection that rarely pays out
- Robin Powell
- 12 minutes ago
- 7 min read
Buying put options to insure a portfolio against a market crash feels like the prudent thing to do. But new research covering more than two centuries of market history finds that portfolio insurance loses money over time — and that it fails in exactly the slow, grinding bear markets that do investors the most harm.
People insure almost everything they value. Homes, cars, phones, even pets: paying a modest premium to guard against a loss you would rather not face is one of the more responsible habits of financial life. Carried across to an investment portfolio, the same instinct looks equally sensible. If a small, regular outlay can cap the damage when markets fall, why not pay it?
A recent study published in the Financial Analysts Journal, the CFA Institute's practitioner journal, put that instinct to the test against 222 years of market data. It examined what actually protected balanced portfolios through the worst episodes in financial history, and found that the most intuitive form of portfolio insurance was among the least effective.
Two centuries of drawdowns
The study was carried out by Guido Baltussen, Professor of Financial Markets at Erasmus University Rotterdam and head of quantitative strategies at Northern Trust Asset Management, with Martin Martens and Lodewijk van der Linden of the Dutch asset manager Robeco. It appeared in the first quarter of 2026.
What sets it apart is the length of the record it draws on. Most studies of crash protection rely on data since the 1980s, a period that contains only two drawdowns of more than 20 per cent in a global 60/40 portfolio of shares and bonds. By stitching together monthly data running back to 1800, the researchers raise that number to eight. The list includes the deepest loss on record — a fall of 71.2 per cent between October 1918 and November 1926 — and a 45.0 per cent decline through the Great Depression, from 1929 to 1933.
Losses on that scale are what make protection worth paying for. Across the eight great drawdowns, the global 60/40 portfolio lost 37.6 per cent on average, against a long-run return of about 7.0 per cent a year.
One point needs stating before a reader reaches for it. The evidence on put options specifically does not stretch across the full two centuries. It begins in July 1986, when the index the researchers use to track a put-buying strategy starts — 36 years and four major equity drawdowns, rather than eight across 222 years. The deep history applies to the drawdowns themselves and to the competing defences; the verdict on puts rests on the shorter, though still substantial, modern record.
What portfolio insurance costs
The strategy the researchers tested is the one an investor would most naturally reach for: buying a put option about 5 per cent below the current level of the S&P 500 and rolling it every month. In effect, it is a standing insurance policy against monthly falls of more than 5 per cent.
From the middle of 1986 to the end of 2021, that overlay returned −2.5 per cent a year, once all the defensive strategies in the study were scaled to the same 5 per cent volatility to make them comparable. The insurance does pay out in a disaster. But the premiums add up to more than the payouts over time.
The cost accrues where investors spend most of their time. In months when equities rose, the put overlay lost 0.54 per cent on average — a steady drag in the state of the world that occurs most often. Put sellers, the paper notes in line with earlier research, charge more for that protection than it returns on average, and the buyer funds the difference month after month.
The payouts are real when they come. Across equity drawdowns deeper than 20 per cent since 1986, the put overlay delivered a cumulative 13.7 per cent. But widen the lens to the drawdowns deeper than 2 per cent that investors actually live through, and the picture changes. On that measure the put drops to fifth place, behind the researchers' own multi-asset defensive strategy, quality stocks and low-risk stocks. The finding is not a quirk of one team's data: it matches earlier work by Harvey and colleagues in 2019 and by Ilmanen and colleagues in 2021.
The crashes puts don't cover
The reason the intuitive strategy disappoints is bound up in how a monthly option works. Consider the scenario the paper itself sets out: a market that falls 4 per cent every month, month after month. The cumulative loss becomes severe. Yet a put struck 5 per cent below the market pays nothing at all, because no single month breaches the 5 per cent threshold before the contract expires and a new one is bought. The insurance is calibrated to a sudden fall, and a grinding decline never trips it.
Contrast that with the kind of crash the strategy is built for. In February and March 2020, as the pandemic took hold, the global 60/40 portfolio lost 12.4 per cent in two months. That is fast and violent, exactly the shape of fall that triggers a put and delivers the protection an investor paid for.
The difficulty is that history's most destructive episodes have more often been slow. The 71.2 per cent collapse of 1918 to 1926 and the Great Depression's decline from 1929 to 1933 were multi-year grinds, not single-month shocks. This kind of portfolio insurance is priced for the rarer shape of disaster and largely absent for the commoner one.
What protected portfolios instead
If puts disappointed, something else did the work. Across the eight great drawdowns since 1800, trend-following strategies — which move with the direction of markets, going short as prices fall — gained 19.3 per cent on average. The authors' own enhanced defensive strategy, a long/short portfolio of factor positions built to move opposite the 60/40, gained 16.6 per cent. It behaves like a put option in that it offers immediate protection, but unlike a put it earns a positive return over the long run.
The loser some readers will not expect is gold. Across the same eight episodes it lost 2.4 per cent on average, and in the worst 10 per cent of months for a 60/40 portfolio it returned −0.4 per cent. It came good in the dot-com crash and in 2008, but measured from 1800 it fails the researchers' test of protection you can rely on, echoing TEBI's earlier finding that gold behaves more like a crisis hedge than a dependable one.
Three caveats keep the findings honest. The first is that the results exclude transaction costs, as the authors state plainly, and both winning strategies trade frequently across dozens of markets. The second is that the two firms employing the authors, Robeco and Northern Trust, offer related investment products — a conflict the paper discloses. The verdict on puts does not depend on believing in the authors' own strategy, and it is corroborated by the independent studies noted earlier. The third is that these are institutional tools. A private investor cannot practically run a long/short overlay spanning dozens of factors and markets, which raises the question of what is actually available to one.
The view from Britain
For most British investors, the question is moot. The mainstream platforms they use — Hargreaves Lansdown, AJ Bell, Vanguard UK, Fidelity Personal Investing — do not offer listed options trading. Buying puts means opening an account with a specialist broker, passing an appropriateness assessment and obtaining options permissions. The packaged alternatives that use options to cap losses, such as buffer ETFs, are easier to reach but tend to sell reassurance more than protection.
The structure counts against it, too. Exchange-traded options generally cannot be held inside a stocks and shares ISA, which excludes them from the tax shelter most retail investors rely on, and gains typically fall under capital gains tax rules. Both points depend on current regulation and are worth checking before acting.
What British investors more often reach for when they want to bet on a falling market is contracts for difference and spread betting — leveraged products quite unlike buying a put.
Their risk warnings are instructive. The large providers disclose, as the regulator requires, that around 70 per cent of retail accounts lose money trading these products with them.
The evidence suggests that investors locked out of cheap portfolio insurance are not missing much. The defences the long record does support are the unglamorous ones most of them already hold: broad diversification, an allocation matched to how much loss they can bear, and the discipline to sit still through a drawdown.
The premium and the payout
Return, then, to the instinct the piece began with. With home insurance, the premium buys protection against a loss you could not absorb on your own. With portfolio insurance, the premiums compound, over time, into a cost larger than most of the disasters they guard against — and the disasters they cover best are the rarer, faster kind, not the slow grind that has done the most damage.
Over 222 years, the portfolios that came through the great drawdowns were not the insured ones.
Resources
Baltussen, G., Martens, M., & van der Linden, L. (2026). The best defensive strategies: Two centuries of evidence. Financial Analysts Journal, 82(1), 6–34.
Harvey, C. R., Hoyle, E., Rattray, S., Sargaison, M., Taylor, D., & Van Hemert, O. (2019). The best of strategies for the worst of times: Can portfolios be crisis proofed? Journal of Portfolio Management, 45(5), 1–22.
Ilmanen, A., Thapar, A., Tummala, H., & Villalon, D. (2021). Tail risk hedging: Contrasting put and trend strategies. Journal of Systematic Investing, 1(1), 111–124.
Building a portfolio that can weather a drawdown
The defences this research supports are simple to name and harder to hold to: broad diversification, a stock-and-bond mix matched to how much loss you can bear, and the discipline to sit through a fall without reaching for protection that costs more than it pays. For readers who would value a professional alongside them, TEBI's Find an Adviser directory lists advisers who have publicly committed to evidence-based investing.
For those who would rather work through the principles themselves first, How to Fund the Life You Want by TEBI editor Robin Powell and Jonathan Hollow sets out how to build and hold a portfolio for the long term. Bloomsbury published the second edition; it is available on Amazon.