There are many ways with which you can protect your investments against market downturns. Here are some of the most effective ways.
Fixed Income and Treasuries
The most elementary way of safeguarding your investments from market downturns is seeking safe haven fixed income assets like Treasuries. If valuations are increasing and economic indicators are lagging, then the market is reporting a disconnect and valuations will surely fall since they are efficiently price over time.
In order to protect themselves from losses, investors can raise cash from mutual funds and other liquid investments and then transfer them to Treasuries when they think a market downturn is about to come.
Essentially, Treasuries have no risks, making them a reliable asset for investors. To be specific, you can invest your cash in Treasury Inflation-Priced Securities (TIPS) to guarantee some rate of return while still beating the market.
Hard Assets
Another safe haven for investors is hard assets like real estate. Since investing in real estate means that you are investing in a tangible asset with tangible value, investing in real estate properties can generally give you some protection during a market downturn.
Even so, homeowners should be careful about the extra financial burdens related to real estate. Some of these obligations include home equity lines of credit. This can put a dent on your credit profile and increase interest payments, which increases your risks during potential market crashes.
Put Options and Hedging
Investors who can’t quite exit their higher risk investments can secure themselves away from potential market losses by buying put options, which is considered the best hedge in such scenarios.
A put option gives you the option to sell when levels reach or go lower than a predetermined degree. The available range of offerings for put options are various and this also paves the way for more hedging choices.
if covering direct stock investments, investors can buy corresponding put options. If identical options are not available, then investors can turn to more sophisticated synthetic put option strategies that replicate a portfolio through put options providing for comprehensive selling in a market downturn.
If they want more general protection, the investors have the choice to seek help from index put options. You can exercise such options when market index reaches a certain level.
Selling Calls
Among the strategies you can use to protect against a market crash is the reverse strategy for buying put options –selling call options.
When selling call options, a seller expects the price of a security to fall and seek to find a buyer who is willing to buy the call option for the right to buy the security at a determined price.
The seller of the call option can benefit from the buyer’s purchase of the security at a higher price than the seller anticipates it to be worth in the trading market.
Similar to put options, call options are traded for specified securities, call options are traded for specified securities and indexes. More complex call option selling strategies can also be developed to synthetically replicate and protect specified investment positions.