Your stock portfolio, carefully constructed over the years, can provide attractive benefits, especially over the long run. Nevertheless, there are times when it doesn’t behave as planned. When stock prices go south, your portfolio’s value can be decimated. Just harken back to March of this year, when fear of COVID-19 gripped the market.
Fortunately, there are a few steps you can take to mitigate losses and even profit when stock prices plummet.
Diversify Your Holdings
Unless you know something special, a concentrated portfolio consisting only of one or two high-beta stocks can turn upside down quickly in a bear market. For most long-term investors, a well-diversified portfolio includes various supplies across various industries and non-stock holdings such as fixed-income, real estate, cash, and precious metals.
Consider Buying Put Options
Puts are a form of options that were created as insurance against drops in security prices. A put gives the put “holder the right to sell a stock to someone at a specific price. When stocks drop, put values rise. Smart investors sell the insurance they own when they increase in value, thus offsetting the drop in price occurring in their long stock holdings.
Take a Look at Inverse ETF’s
There are several inverse ETF’s that rise in value when the stock world collapses. Indeed, some of these are leveraged two or three times, although plenty of unleveraged inverses. ETF’s is available for purchase as well. Owning a small amount of these as insurance against market falls can be a good idea.
Cash Is King
Perhaps you heard the saying that “Cash is king.” Holding a reserve of 20% or more in a money market doesn’t pay much while it sits there but can provide means to pick up real stock bargains when they appear. Remember, when the market drops, it generally does so quickly. Having cash on hand enables you to be quick to respond.
Hopefully, with a little skill and a dash of luck, one or more of these techniques will pare back the losses you may realize during a bear market, especially if you have a concentrated, 100% stock portfolio. Indeed, you may even be able to book some profits.