There are many ways to protect your stocks from an unpleasant surprise in the equity and bond markets. Take this investment advice and LEARN the pros and cons of 3 investment strategies below before making any decisions about your retirement.
1.) Buy Insurance for your Portfolio
When someone buys a house or a car it is assumed and is often a requirement to purchase insurance for that asset. When you think about your investments ask yourself:
- Do you have any form of insurance to protect you from loss?
- What is the potential risk that your portfolio is exposed to?
- Could you sustain a 30-50% drop in your investment accounts?
- What kind of impact would a large drop in account value have on your lifestyle or future dreams?
- Have you thought about the need and or benefits of adding protection to your investment portfolio?
There are a variety of ways to insure your investments, one simple example is called a Married Put, an option strategy named after an old IRS ruling. This happens when an investor purchases a put option contract while at the same time purchasing an equivalent number of shares of the underlying security.
This type of option strategy can be used when an investor wants the benefits of stock ownership but has concerns about the unknown downside market risks.
Sounds like simple investment advice right? Then why isn’t your advisor talking to you about this simple hedging strategy while markets are at all time highs and a variety of economic and geopolitical concerns loom around the corner?
Maybe it’s time to interview a new advisor….(Interview New Advisor)
The equity and bond markets have been on bull runs for a very long time and as our last blog discussed there are several reasons why that run MIGHT come to an end. If you’re retired or nearing retirement and exposed to the equity markets, bond markets, or real estate markets I would advise taking a look at the pro’s and con’s of buying Options against those holdings.
Right now when index options are cheap relative to long term history is the time to take action if action becomes part of your plan.
Of course, with any investment or insurance there are pros and cons to this strategy. The purpose of this article isn’t to tell you to take action today, it’s to tell you to think for a minute and consider a solution that’s different than heading down a class 5 rapid without any oars.
2.) Buy Inverse ETF’s
An Inverse ETF like ProShares UltraPro Short S&P 500 (SPXU) can work as a synthetic equivalent to buying Puts against your stock positions. SPXU will benefit you in a market correction by increasing in value as the S&P 500 declines. In theory it will gain 3X as much as the S&P loses so if the S&P 500 is down 2% your UltraPro Short ETF should be up 6%.
As an example, assume you have $1,000,000 and you want to have something (smart investment) to offset the pain that would accompany a 40% drop in the S&P 500. Maybe you purchase $100,000 worth of SPXU. In theory your SPXU holdings would increase by 120% (3X the S&P 500 losses) which would without a doubt alleviate some of the pain from your equity holdings- in a down market this can be both a safe and smart investment strategy!
Of course if you’re wrong you will benefit with your traditional long holdings, but your SPXU holdings will lose as the markets climb higher.
If the market stays in the same place SPXU will work better than buying Long Puts. In a flat market your SPXU position remains in tact while the same flat market erodes the premium/cost of your Long Put contracts.
When working with leveraged ETF’s like this you MUST be sure to know your calculations and of course when in doubt ask for help from or just work with a pro like us (Click Here For Questions).
3.) Take Some Profits
Ok, so you rode the market down to it’s lows and had the guts to ride it back to the current levels…will you learn your lesson this time? When’s the time to take profits? Should you hang on and pray? You can do what you want, but if you decide that the risk of a market crash is making your stomach turn why not take some profits?
OMG did he just say take some profits? That’s the worst investment advice on earth! You’re supposed to buy and hold and that means FOREEEEEEVERRRR!
Listen, if you’re at or near retirement, or if you just believe in statistics… now is as good of a time as any to CONSIDER taking some (or maybe all) of your profits. If you decide to take profits it’s pretty simple. Login to your account (or call your broker) and sell (x) amount of your holdings. Chances are your broker will fight you tooth and nail, but if you made the choice and you know you can’t tolerate a 50% drop and you know a 50% drop would feel worse and impact you more than a 50% gain from here… then stand firm on your decision. Take some time on the sidelines and re-evaluate your choices. Note I wouldn’t recommend moving to bonds right now either, click Are Bonds Safe Investmentprofessor.com to find out why.
Ok, you’ve been warned!
Not sure how to invest for retirement?
You now have 3 solutions to reduce risk (eh em…possible ways to invest for retirement) from the highly probable stock market correction that will ROCK YOUR WORLD (Right @bretmichaels?) if it comes to fruition.
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This presentation is for informational purposes only and is not INVESTMENT ADVICE, TAX ADVICE, or LEGAL ADVICE. THE INFORMATION IN THIS ARTICLE MAY OR MAY NOT APPLY TO YOUR SPECIFIC SITUATION. CONSULT WITH A FINANCIAL, LEGAL, OR TAX TEAM ABOUT YOUR SPECIFIC SITUATION.