How to protect your stock investments

Unless otherwise noted, the opinions provided are those of the speaker or author and not necessarily those of Fidelity Investments or its affiliates. Related Terms Mutual Fund Definition A mutual fund is a type of investment vehicle consisting of a portfolio of stocks, bonds, or other securities, which is overseen by a professional money manager. Furthermore, if you invest in «dividend aristocrats,» those companies that have been increasing dividends for 25 consecutive years, you can be virtually certain that these companies will up the yearly payout while bond payouts remain the same. Stock portfolios that include 12, 18 or even 30 stocks can eliminate most, if not all, unsystematic risk, according to some financial experts. Your Money.

After all, it seems more likely the market will fall rather than rise significantly from current levels. So what are some good ways to protect your portfolio, inveztments gains if you have any? Well, for some, times like these call for standard off-the-shelf tools and techniques. They recommend buying ETFs that short the market, or buying puts, or selling covered calls. To be fair, however, not all advisers are fond of this approach.

What is a protective put?

Warren Buffett, arguably the world’s greatest stock picker, has one rule when investing: Never lose money. This doesn’t mean you should sell your investment holdings the moment they start heading south. But you should remain keenly aware of their movements and the losses you’re willing to endure. While we all want our assets to be fruitful and multiply, the key to successful long-term investing is preserving capital. While it’s impossible to avoid risk entirely when investing in the markets, these six strategies can help protect your portfolio. One of the cornerstones of modern portfolio theory MPT is diversification. In a market downturn, MPT disciples believe a well-diversified portfolio will outperform a concentrated one.

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Warren Buffett, arguably the world’s greatest stock picker, has one rule when investing: Never lose money. This doesn’t mean you should sell your investment holdings the moment they start heading south. But you should remain keenly aware of their movements and the losses you’re willing to endure. While we all want our assets to be fruitful and multiply, the key to successful long-term investing is preserving capital.

While it’s impossible to avoid risk entirely when investing in the markets, these six strategies can help protect your portfolio. One of the cornerstones of modern portfolio theory MPT is diversification. In a market downturn, MPT disciples believe a well-diversified portfolio will outperform a concentrated one.

Investors create deeper and more broadly diversified portfolios by owning a large number of investments in more than one asset classthus reducing unsystematic risk.

This is the risk that comes with investing in a particular company. How to protect your stock investments portfolios that include 12, 18 or even 30 stocks can eliminate most, if not all, unsystematic risk, according to some financial experts.

The opposite of unsystematic risk is systematic riskwhich is the risk associated with investing in the markets generally. Investmments, systematic risk is always present. However, there’s a way yohr reduce it, by adding non- correlating asset classes such as bonds, commodities, currencies, portect real estate to the equities in your portfolio.

Non-correlating assets react differently to changes in the markets compared to stocks—often, they move in inverse ways, in fact. When one asset is down, another is up. So, they smooth out the volatility of your portfolio’s worth overall. Ultimately, the use of non-correlating assets eliminates the highs and lows in performance, providing more balanced returns.

At least that’s the theory. This strategy has become harder to implement In recent years. Following the financial crisis ofassets that were once non-correlating now tend to mimic each other and move in tandem response to the stock market. Investors generally protect upside gains by taking profits off the table. Sometimes this is a wise stocj. However, it’s often the case that winning stocks are simply taking a rest before continuing higher.

In this instance, you don’t want to sell but you do want to lock in some of your gains. How does one do this? There are several methods available. The most common is to buy put optionswhich is a bet that the underlying stock will go down in price. Different from shorting the stock, the put gives you the option to sell at a certain price at a specific point in the future.

You’re convinced that its future is excellent but that the stock has risen too jour and is likely will decline in value in the near term. At this point, you sell the option for a profit to offset protetc decline in the stock price. Investors looking for longer-term protection can buy long-term equity anticipation securities LEAPS with terms as long as three years. It’s important to remember that you’re not necessarily trying to make money off the options but are instead trying to ensure your unrealized profits don’t become losses.

Investors interested in protecting their entire portfolios instead of a particular stock can buy investmehts LEAPS that work in the same manner. Stop loss orders protect against falling share prices. There are several infestments of stops you may use. Hard stops involve triggering the sale of a stock at a fixed price that doesn’t change. A trailing stop is different in that it moves with the stock price and can be set in terms of dollars or percentages.

What happens next determines which is more advantageous. Proponents of stop losses believe stoxk they protect you from rapidly changing markets. Opponents suggest that both hard and trailing stops make temporary losses permanent.

It’s for this reason that stops of any kind need to be well-planned. Investing in dividend-paying stocks is probably the least known way to protect your portfolio. Historically, dividends account for a significant portion of a stock’s total return. In some cases, it can represent the entire.

Owning stable companies that pay dividends is a proven method for delivering above-average returns. In investmsnts to the investment incomestudies show that companies that pay generous dividends tend to grow earnings faster than those that don’t. Faster growth often leads to higher youur prices which, in turn, generates higher capital gains. So, how does this protect your portfolio? Basically, by increasing your overall return. When stock prices are falling, the cushion dividends provide is important to risk-averse investors and usually results in invextments volatility.

In addition to providing a cushion in a down market, dividends are a good hedge against inflation. By hpw in blue-chip companies that both pay dividends and possess pricing poweryou provide your portfolio with protection that fixed-income investments —with the exception of Treasury inflation-protected securities TIPS —can’t match.

Furthermore, if you bow in «dividend aristocrats,» those companies that have been increasing dividends for 25 consecutive years, you can be virtually certain that these companies will up the yearly payout while bond payouts remain the. If you are nearing retirement, the last thing you need is a investkents of high inflation to destroy your purchasing power. Investors who are worried about maintaining their principal investmentz want to consider principal-protected notes with equity participation rights.

They are similar to bonds in that they are fixed-income securities that return your principal investment to you if held until maturity. However, where they differ is the equity participation that exists alongside the guarantee of principal.

These notes will hhow in five years. The issuer would buy zero coupon bonds that are maturing around the same time as the notes at a discount to face value. The bonds would pay no interest until maturity when they are redeemed at face value. The bonds would mature and, depending on the participation rateprofits would be distributed at maturity. Risk-averse investors will find principal-protected notes attractive. Before jumping on board, however, it’s important to determine the strength of the bank guaranteeing the principal, the underlying investment of the notes and the fees sfock with buying.

Each of youd strategies can protect your portfolio from the inevitable volatility that exists in the investment world. Not all of them will suit you or your risk tolerance. Potect putting at least some of them in place may how to protect your stock investments help preserve your principal—and help you sleep better at night.

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Table of Contents Expand. Non-Correlating Assets. Put Options. Protetc Losses. Principal-Protected Notes. The Bottom Line. Preservation-of-capital techniques include diversifying holdings over different asset classes and choosing assets that are non-correlating that is, they move in inverse relation to each. Put options and stop-loss orders invesmtents prevent stem the bleeding when the prices of your investments start to drop. Dividends buttress portfolios by increasing your overall return.

Principal-protected notes safeguard an investment in fixed-income vehicles. Compare Investment Accounts. The offers that appear in this table are yoir partnerships from which Investopedia receives compensation. Related Articles. Partner Links. Related Terms Mutual Fund Definition A mutual fund is a type of ykur vehicle consisting of a portfolio of yout, bonds, or tp securities, which is overseen by a professional money manager.

Short Selling Definition Short selling occurs when an investor borrows a security, sells it on the open market, and expects to buy it back later for less money. Bond A bond is a fixed income investment in which an investor loans money to an entity corporate or governmental that borrows the funds for a defined period stokc time at a fixed interest rate.

What is a Certificate of Deposit CD? Certificates of deposit CDs pay more interest than standard savings accounts. Find the highest nationally available rates for protcet CD term here from federally insured banks and credit unions. Pension Plan A pension plan is a retirement plan that requires an employer to make contributions into a pool of funds set aside for a worker’s future benefit.

Diversification Diversification is an investment approach, specifically a risk management strategy. Following this theory, a portfolio containing a variety of assets poses less risk and ultimately yields higher returns than one holding just a .

How to Protect Your Stock Portfolio from a Stock Market Crash! 😨

Traders should recognize that the cost of options tends to be relatively higher before an increase in expected volatility, and so the premium for invsstments protective put might be investmentw expensive before an earnings report. For example:. There are several yokr of stops you may use. Opponents suggest that both hard and trailing stops make temporary losses permanent. Following the financial crisis ofassets that were once non-correlating now tend to mimic each other and move in tandem response to the stock ot. There are two types of options: calls and puts. However, you are concerned about the global economy and how any broad market weakness might impact the stock. The subject line of the email you send will be «Fidelity. Unless otherwise noted, the opinions provided are those of the speaker or author and not necessarily those of Fidelity Investments or its affiliates. The bonds would pay no interest until maturity when they are redeemed at face value. Fidelity does not assume any duty to update any of the information. Investors generally protect upside gains by taking profits off the table. Not all of them will suit you or your risk tolerance. Thank you for subscribing. Search fidelity.