Volatility is a funny thing; it makes people re-evaluate their interest in investing altogether.
The reason for the doubts and second-guessing surely has more to do with a poor or non-existent asset allocation model, in which case investors are wise to adopt an asset protection program.
This makes sense when you think about it: just as we insure our lives against the risk of death, we must also insure our portfolios or at least take the right actions to protect them against severe market shifts.
Here are three things investors can do to protect their investment portfolios: 1.
Buy protective put option to minimize potential losses.
Although it will typically make little sense for an investor to purchase at the money puts to protect one's portfolio, purchasing at prices that are 10-20% below their current values (assuming current values are at a decent gain) will ensure the underlying securities will not impact the overall portfolio in the even of a market correction.
This is arguably one of the cheapest ways that an investor can protect a portfolio since out of the money put options are always cheaper than current-price put options.
2.
Use bear Exchange Traded Funds to help offset risks.
Depending on where the investor sees risks to their portfolio, an appropriate bear-based exchange traded fund (ETF) can actually help mitigate risks and stabilize a portfolio's total value.
Using an ETF to achieve this type of stability is one of the simplest ways that an investor can neutralize potential risks.
However, it is also a strategy that, if too broad, can neutralize returns as well (e.
g.
as the portfolio increases, the ETF decreases, and vice versa; therefore, the investor must still take a position as to the overall value of the portfolio and decide which risks warrant offsetting).
3.
Proper Asset Allocation.
Unlike the two active strategies above, using a proper asset allocation allows an investor to offset non-systemic risks, but asset-specific risks instead.
This is a more conservative approach in that the investor essentially believes that while one asset class corrects, another will neutralize the impact of such a correction by either sheltering some of the assets from broad selloffs or by actually increasing in value.
This strategy can also include options or bear-ETFs.
However, it is still possible that all asset classes can depreciate in value, thereby potentially exposing an entire portfolio to the risks an investor wants to avoid altogether.
Ultimately, investors will still need to take a position when it comes to their portfolio.
How they take the position is important as it can either completely wipe out gains or can cause deeper exposure that one may not want.
Using any of the three strategies outline above to protect your investment assets will reduce risks, sometimes at a cost (as in the case of options) and sometimes not.
The reason for the doubts and second-guessing surely has more to do with a poor or non-existent asset allocation model, in which case investors are wise to adopt an asset protection program.
This makes sense when you think about it: just as we insure our lives against the risk of death, we must also insure our portfolios or at least take the right actions to protect them against severe market shifts.
Here are three things investors can do to protect their investment portfolios: 1.
Buy protective put option to minimize potential losses.
Although it will typically make little sense for an investor to purchase at the money puts to protect one's portfolio, purchasing at prices that are 10-20% below their current values (assuming current values are at a decent gain) will ensure the underlying securities will not impact the overall portfolio in the even of a market correction.
This is arguably one of the cheapest ways that an investor can protect a portfolio since out of the money put options are always cheaper than current-price put options.
2.
Use bear Exchange Traded Funds to help offset risks.
Depending on where the investor sees risks to their portfolio, an appropriate bear-based exchange traded fund (ETF) can actually help mitigate risks and stabilize a portfolio's total value.
Using an ETF to achieve this type of stability is one of the simplest ways that an investor can neutralize potential risks.
However, it is also a strategy that, if too broad, can neutralize returns as well (e.
g.
as the portfolio increases, the ETF decreases, and vice versa; therefore, the investor must still take a position as to the overall value of the portfolio and decide which risks warrant offsetting).
3.
Proper Asset Allocation.
Unlike the two active strategies above, using a proper asset allocation allows an investor to offset non-systemic risks, but asset-specific risks instead.
This is a more conservative approach in that the investor essentially believes that while one asset class corrects, another will neutralize the impact of such a correction by either sheltering some of the assets from broad selloffs or by actually increasing in value.
This strategy can also include options or bear-ETFs.
However, it is still possible that all asset classes can depreciate in value, thereby potentially exposing an entire portfolio to the risks an investor wants to avoid altogether.
Ultimately, investors will still need to take a position when it comes to their portfolio.
How they take the position is important as it can either completely wipe out gains or can cause deeper exposure that one may not want.
Using any of the three strategies outline above to protect your investment assets will reduce risks, sometimes at a cost (as in the case of options) and sometimes not.