All over the news the entire summer were stories questioning whether or not the United States and world economies were slipping back into another recession. More and more months go by and job creation is still not being see in the US. There are more and more issues creeping up in Europe that are scaring investors because those issues can have serious effect in the US.
After hitting new highs in the stock market in April we have been on a roller coaster ride downward since then. So how do you protect yourself during these tough times so that you don;t turn on the TV and see the markets down 500 point and instantaneously get sick to your stomach.
Before the market crash of 2007-2008 I would have told you to make sure you had a diversified portfolio. When I say this I mean make sure you hold stock or funds from several different sectors. Don’t just hold a bunch of tech companies such as Apple and Microsoft. Have a portfolio with a tech company like Apple, oil company like Chevron, a bank like Wells Fargo and such. When you have a diversified portfolio one can go down but the others might still be going up. When the market crashed this theory fizzled because everything went down. It didn’t really matter what sector it was. Some were worse than others but they all went down.Normally I would say that shifting into bonds is a great move of protection but lately that has even seemed like an unsafe move. Earlier this year one of my favorite finance websites The Motley Fool wrote an article on the top five ways to protect your portfolio during a downturn.
- Investing in Gold – For the last few years this has been about as solid of a winner as you can get. Over the past couple of weeks we have finally started seeing the long over due correction in the gold market. Over the long term however gold and commodities have been a very safe hedge against falling stock prices.
- One of the best ways to protect your currently long positions is to buy Put options. I will always suggest puts over actually short selling a stock. Short selling a stock leaves you vulnerable to a market bounce and in turn a big loss. If you buy a put option you are only risking a small initial investment but you have a upside of a possible 100%+ gain if the stock goes down and hits your strike price. I will talk more about options at a later time.
- Make sure you are investing for the long term and not trying to trade these sharp and sudden market swings. Invest in low beta (less risky) consumer staples companies. While these might have downswings also they tend to be much less than the market average. A few great names are Proctor & Gamble, Kraft or Coca-Cola.
- Keep an eye out in the news and look for what big investors are doing with their money. I like to follow names such as Warren Buffett and Carl Icahn. These are two of the biggest investors in the world. When they invest in companies there is good reason to do so and I listen. They tend to invest in undervalues companies that have a good upside in the future.
- Last and more important is be patient with your investing. What goes down must come back up. What goes down must come up plays into stocks also. If you have a longer time horizon than you might be able to handle losses with the knowledge that you can add more to your investment as the stock heads lower.
I like to think of market corrections this way. They are an investors best friend. If you have your portfolio positioned correctly a correction will just lead to a great buying opportunity in the future.