Let’s be clear, it is really hard to see your hard-earned money evaporating when the stock market is in turmoil. In this article, we will be providing some helpful ideas on how to manage a down market and how to protect your portfolio from getting eviscerated. There are multiple strategies that fit each market environment and ways to react to changing market conditions. You can deploy these strategies based on the market‘s condition. Some people can stomach volatility, and some cannot. Below, you will find methods ranging from a small market correction to full sell off mode.
This is the golden principal when investing in the stock market. Each company reacts to the same events differently. For example, when the COVID-19 pandemic hit, stock markets lost their mind. Indexes declined as much as 10% or more some days. Some stocks recovered and hit their all-time highs while some lost almost 90% of their value in less than a month. Betting all your money on one company is closer to gambling than investing. It is acceptable to concentrate your portfolio when you manage a small account. However, the more companies you own, the better.
2- Buy Stocks that will Benefit from the Changing Market Environment
Even in bear markets, sometimes there are companies that benefit from the events that are taking the markets down. For example, with the FED tightening and hiking rates this year, it makes more sense to buy good quality banks than high growth stocks that have little to no revenue or profit. The financial sector tends to do good when rates are higher.
3- Selling Calls Against Your Positions
If you own hundred shares of a company, you are eligible to right a call on it. You can collect an income while your stock is going down. This strategy is called covered calls. Covered calls are often used by investors who intend to hold the underlying stock for a long time, but do not expect an appreciable price increase in the near term.
4- Buying Puts
This is when your position shows a sign of weakness and signs that it could go lower than you can handle. Buying puts is the safest way to short the market and participate on the way down by risking only the premium paid to buy the put.
5- Going Short
Selling short is a trading strategy for down markets, but there are risks, particularly for naked positions. Short sellers take advantage of a down market by borrowing shares of a particular stock and sell in hope of buying later at a lower price. This strategy is highly profitable if it timed correctly because markets tend to go down faster than up. Short selling is a risky strategy for beginners and needs a lot of market mechanism comprehension. Short selling can be used like a tool for portfolio protection by identifying the winners and the looser in the same sector.
When the markets are showing a lot of weakness and the sentiment is shifting to a bearish outlook, it may be prudent to just exit and initiate an entry at a later time.
Disclaimer: This article for education purposes. We are educating our reader and giving ideas on how market makers and big hedge funds manage a bad trade. Please use the strategy that fits your need, purpose, and personality.