8 strategies to protect your money from falling stocks
8 strategies to protect your money from falling stocks, I know what you’re thinking: Why, oh why, didn’t we all simply “sell in May and go away” as that foolish Wall Street adage advised?
The Dow Jones Industrial Average DJIA, -0.52 percent, and the S&P 500 SPX, -1.15 percent, both fell more than 3% on Thursday, following the Federal Reserve’s half-point interest rate hike on Wednesday.This was the largest increase in interest rates in 20 years. The Nasdaq Composite COMP, -2.26 percent, fell a startling 5 percent.(will revise)
Numerous other publications will elaborate on the hows and whys of recent volatility. This entails potential market-attractive activities that can be undertaken via tactical alternatives and defensive strategies.
Concern yourself only with mastering advanced options and futures trading techniques. All of these options are liquid and easy to trade in the majority of basic brokerage accounts. Remember that you should do your own research and make decisions based on your own goals, not on what a “pundit” tells you to do.
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Sell short in the market.
Want to “short” the stock market if you believe it will continue to decline? The ProShares Short S & P500 ETF SH, +1.06%, is a straightforward and liquid way for small investors to profit from falling stock prices.Through a system of derivatives contracts, the roughly $2 billion fund attempts to produce the inverse of the daily movement of the S&P 500 index.
This is not an exact inverse of the S & P 500 over the long term, but it is very close. For example, this ETF is up 7.2% over the past month while the S&P 500 is down 7.4% over the same time period as of Thursday’s close.
There are more types of “inverse” funds that short the market. Consider the tactical Tuttle Capital Short Innovation ETF (SARK, +6.94%, for instance, if you’re looking for a tech-focused fund to bet on the decline of this specific industry. This roughly $350 million ETF seeks to produce the opposite of the once-popular equities that comprise the floundering ARK Innovation ETF (ARKK), -6.91 percent. This inverse fund gained 27.7% during the previous month.
Obviously, as the stock market increases, these inverse funds decrease. In the case of SARK, it might fall just as quickly.
“insurance” for tail risks
The Cambria Tail Risk ETF (TAIL), +1.94 percent, is a one-of-a-kind investment vehicle that focuses on “out-of-the-money” put options purchased on the US stock exchange, as well as a significant allocation to low-risk US Treasuries.
The concept is that these long-shot options don’t cost much while the market is calm, but that they serve as a type of insurance against catastrophe.
Similarly to your auto insurance, you are insured in the event of a collision and compensated for your damages. As evidence of this strategy, while the Dow Jones plummeted over 1,000 points on Thursday, TAIL gained 2.2%.
However, it has decreased by more than 11 percent over the past year, significantly more than the S&P 500’s 4 percent loss. This is the cost of this type of insurance when it is unused, but in turbulent times such as these, the safety net comes in useful.
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Numerous investors minimize their risk profile or increase their profits by utilizing options. A fund such as the JPMorgan Equity Premium Income ETF JEPI, +0.16% could be worth considering if you are not interested in trading options on your own. JEPI is a $9 billion fund that has exposure to the S&P 500. Its managers also sell options on U.S. large-cap stocks using a method called “covered calls.”
In a nutshell, selling these options contracts limits your upside potential if the market is soaring but ensures a cash flow if the market moves sideways or down. Consequently, the JEPI has had a yield of almost 8% over the past year, and while it has declined by 5.5% over the past month, this is not as severe as the S&P’s 7.5% decline over the same period.
If you want to use this strategy on the tech-heavy Nasdaq-100 index, you can buy the nearly $7 billion Global X NASDAQ 100 Covered Call ETF QYLD, -0.06%.
Low-volatility exchange-traded funds
Low-volatility funds offer an alternative to conventional investment strategies by employing a filter that eliminates the most volatile investments. This naturally implies that they may underperform during market booms but tend to be “least awful” when the going gets rough.
Consider the $9 billion New York Stock Exchange-traded Invesco S&P 500 Low Volatility ETF SPLV, +0.08%.This fund has underperformed over the past three to five years due to an environment that has been generally favorable for stocks but volatile to the upside. But in 2022, it is down 5.2%, significantly less than the S&P 500’s 13.2% decline.
Other “low vol” options include the globally diversified iShares Edge MSCI EAFE Min Vol Factor ETF EFAV, -0.82%, which provides lower volatility exposure to Europe, Australasia, and the Far East.
(Almost) instantaneous maturity bonds
The rate environment is, indeed, turbulent. However, if you shorten your duration by investing in bonds that mature in nearly no time, you can generate a small amount of income while largely avoiding the risk of rising interest rates.
Consider that, while the popular iShares 20+ Year Treasury Bond ETF TLT, +1.72 percent, has fallen more than 22 percent in 2022 due to rising interest rates, its sister fund, the iShares 1-3 Year Treasury Bond ETF SHY, +0.03 percent, has fallen only 3.1 percent and has a yield of around 2 percent to help offset this.
If you are interested in short-term corporate bonds in addition to Treasurys, the actively managed Pimco Enhanced Short Maturity Active ETF (MINT), +0.03 percent (MINT) is down just 1.85 percent this year and yields similar yearly payouts. Essentially, you are treading water.
Neither of these short-term bond funds will contribute considerably to the growth of your nest egg, but they are worth a look if you are interested in capital preservation and a modest income.
Another strategy for fixed-income markets is to hold bonds while implementing measures to mitigate the effects of rising interest rates.This is the goal of funds like the $379 million WisdomTree Interest Rate Hedged U.S. Aggregate Bond Fund AGZD, +0.30 percent, which invests in investment-grade corporate and Treasury bonds while also holding a short position in U.S. Treasurys.The idea is that the corporates will bring in money, and the short positions will make up for any loss in the value of the primary positions.
This may seem strange, but the idea is that the income stream comes from corporate bonds, and the short positions balance out the long positions to make up for a possible drop in the value of the principal.
As it is not a precise science, the relevant term is theoretically. But so far, this strategy seems to be working, as the fund is down 1.45% in 2022, when the rest of the bond market is in shambles, while still giving shareholders about 2% back each year.
Adapt to higher rates.
What if, amid the current rate of volatility, you desire an upside bet on bonds as opposed to a hedge? Then look no further than the approximately $200 million PFIX, -3.69 percent Simplify Interest Rate Hedge ETF.
The fund is heavily invested in OTC interest-rate options that are meant to appreciate in tandem with any increase in long-term interest rates. And given the Fed’s recent actions, this strategy is yielding enormous returns.
How big? This ETF increased by 5.4% on Thursday as Wall Street absorbed the Federal Reserve’s action and other developments. And it is up 63 percent year to date due to a consistent increase in bond yields.
Even though stocks and bonds have a place in a diversified portfolio no matter how the economy is doing as a whole, it is becoming more and more important to know that they are not the only two asset classes.
The Invesco Optimum Yield Diversified Commodity Strategy No K-1 ETF PDBC, +0.23 percent is one of the most straightforward ways to gain diversified and hassle-free commodity exposure through an exchange-traded product.This $9 billion fund consists of the most popular commodity-linked futures contracts in the world, such as aluminum, crude oil, corn, gold, and wheat. Most importantly, it is made to keep you from having to deal with a lot of paperwork and the dreaded K-1 tax form that comes with some commodity-linked investment schemes.
If you prefer a specific flavor, there are dedicated commodities funds available, such as the $68 billion SPDR Gold Trustee GLD, -0.54 percent, or the United States Natural Gas Fund UNG, +7.10 percent, which has risen an incredible 140 percent year to date.funds, such as PDBC, are preferable to a transaction centered on a single commodity.
Standard index funds
These options simply serve to confound you. Then keep in mind that, over the long term, stock prices rise. Since at least the Great Depression, rolling 10-year returns for stocks have been positive, so the true remedy for a portfolio in the red may be to be patient.
Consider that the S&P 500 reached a reading of 666 on March 6, 2009, which was among the financial crisis’s bear-market lows. Currently, this benchmark exceeds 4,000. And even if you had the very worst timing prior to the crisis and invested everything at the pre-Lehman highs, you would have more than doubled your money given the index’s closing-bell top of 1,565 in 2007.
In addition to any of these more tactical options, consider a long-term investment in SPDR S&P 500 Trust SPY, -1.14 percent or your preferred index fund. According to a proverb, you can become wealthy by being greedy when others are frightened, even if it takes a while for your investment to pay off.
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