The U.S. market has changed, there’s no doubt about it. The situation is drastically different than it was ten years ago. What’s more, it will most likely be completely distinct in ten years, as well.
Still, we are all trying to make proactive steps and get ahead of the market, or at least not stay too far behind. However, that’s not an easy task. Market corrections make it very difficult to guard against losses. So, what to do?
Well, the steps we take depend on what kind of an investor we are — with a high or a low tolerance for risk. Keeping a large percentage of the entire net worth in stocks is a sight of long-term commitment from an investor who’s willing to take huge risks. On the other hand, low-risk investors prefer to keep a much smaller percentage of their net worth in stocks.
The market fluctuation goes both ways. So what are we supposed to do to hedge the risks? Hedging the risks and keeping up with the market corrections requires a tailored investment program that’s personalized to the individual’s needs and abilities.
However, there are some tips that we can follow to come up on top.
Advice #1 — Don’t give in to the panic
Here’s the thing — when blind panic hits, most people forget about the recovery rally. When we panic over a dip in the market, we usually tend to sell. And that’s never a good thing, especially considering that economic experts are still convinced that we will see significant growth in the near future.
Advice #2 — Take advantage of the dip
A clever tactic is to be on the lookout for parts of the market and stocks that are showing promising signs of recovering. However, keep in mind that you should avoid potential head fakes. To do that, look for signs of a higher move. Furthermore, we have to be aware of all the factors that contribute to “high highs” — tax reforms, GDP growth, movements in unemployment and consumer spending, etc.
Advice #3 — Wait it out
Fluctuation in the market can shake our confidence. Therefore, some of us might feel more secure if we just — wait it out. Waiting for a recovery rally is a solid tactic. However, keep in mind that waiting too long might result in more potential loses because the market recovers quickly.
Advice #4 — Cover the what ifs
Our portfolios have to be hedged against potential declines. Let’s take the crash of the Dow Jones that happened earlier this year as an example. The collapse of a 1,000 points scared many, especially considering the contradictory predictions that the crash will be followed either by a 10% correction, or a 2,500 point drop. Those of us who haven’t hedged our portfolios for such a decline had a hard time dealing with the situation.
What’s more, protecting the portfolio should be our number one concern at all times. That’s especially true considering that we can’t really pinpoint potential corrections in time — we have to be prepared at all times.
What we also have to remember is that bull markets are finicky. Just think of the highs and lows of bull markets from 1929 and 2008. Furthermore, leaving the portfolio unprotected is unwise, considering that experts get too bullish when the market is at the top, and not the bottom, as most would think.Therefore, take full advantage of the opportunities to hedge for the market downside. We selected the best four opportunities for you:
- Consider buying a put option on the DIA, the SPY, or the NASDAQ
- Move at least a part of your portfolio and exchange it for cash
- Use ETFs to hedge your long positions — good choices are various Pro Shares options such as the Short, Ultra Short, and Short Russell 2000.
- Buy Volatility Index calls (VIX) to be able to trade potential for Volatility