I can’t help but compare a stock market correction to the rough seas I experienced in the Navy while aboard ship. Every time we have market correction, it would seem many investors start to get sea sick. What I mean is their tolerance for risk changes and all they want to do at any cost is protect the portfolio from further decline. Even though your emotions sway like a tug boat on rough seas, there are some portfolio protection strategies you can use in your investments right now.
What’s even better is the fact that none of these strategies require very little cost or changes to your existing investments. Let’s get underway shall we?
One of the cornerstones to any portfolio is diversification. Spreading your investments among different types of asset classes will help weather the market storm better than a concentrated portfolio. Diversification helps protect the portfolio from being affected too much by one asset class. If you are concentrated in just a few types of investments, and those asset classes are going down, your ship will sink too. So listen to this old piece of advice….diversify, diversify, diversify. Did I say that enough?
All of my clients use non-correlating assets. By adding bonds, alternatives, real estate and commodities to stocks, the result is much lower volatility in the portfolio. Most of these asset classes will perform differently at any given time, usually independent of what the stock market is doing. Therefore, the result is a more balanced and calmer sea of returns.
Dividends are probably the most overlooked technique for protecting your portfolio. Dividends can help boost return during good times. In addition, dividends can decrease volatility by providing some cushion during a market decline. Buying blue chip companies that pay good dividends is a solid strategy. Look for companies that have paid dividends for decades. You’ll be rewarded with consistent income.
I can’t understand why investors don’t use stop losses. It’s the equivalent of not having enough life boats on the Titanic for all the passengers! A stop-loss protects against falling stock share prices. For example, XYZ stock is selling at $10, you put in a stop-loss at $8. If the stock falls to $8 you’re out. No further worry about the stock falling.
I know what you’re thinking, what if the stock bounces back up? Well, no strategy is perfect. Place the stop low enough that you don’t get sold out during normal market swings. It’s a strategy for determining your maximum loss.
Principal Protected Investments
Principal protected investments are like wearing a motion sickness patch during rough seas. If you just can’t stomach market volatility anymore, there are a number of investments that will protect your principal. Some examples would be fixed annuities, CDs and treasuries. Before you cash in the entire portfolio, there are techniques that can combine traditional investments with the use of principal protected securities. So don’t give up yet.
When I first reported to my ship in the Navy, the USS DeWert FFG-45 (pictured here),one of the first things I noticed was that my workstation and my bed had seat belts. Yikes! While I don’t actually have a seat belt for your portfolio, each of these techniques can help protect your portfolio from the inevitable rough seas that are ahead. Use one or any combination of several. Think of them as portfolio Dramamine! If you want some help with your portfolio, write me at email@example.com, or call me at (859) 225-2596.