market correction

The Three Easy Ways to Withstand a Market Correction

The Market is setting new highs on a weekly basis. While there is still more fuel in the pipeline in the form of tax cuts, and continued low long term rates, the market is now almost nine years long. Eventually gravity will take its toll on the market. Are you ready?

What are some strategies that an investor can deploy and still take advantage of market growth? Some strategies get rather exotic, and actually take time and care to deploy.  For those worried about a market correction, here are three strategies that are fairly painless, and will help you sleep better at night!

Here are three strategies for withstanding a market correction that are fairly painless, and will help you sleep better at night!

1. Diversify (but with a twist) – Every investment textbook touts the benefits of reducing risk by investing in multiple stocks in diverse AND non-correlated industries. The twist is to avoid industries that either won’t benefit from the tax cut, or that may have become overvalued without any upside impetus. A good example is utilities. Utilities have benefited from lowering energy prices over the last five years. That direction appears to be at an end, and most utilities will be mandated to pass the benefits of the tax cut on to their customers in the form of lower prices. Find industries that will continue to benefit from the strong economy, and that have trapped earnings overseas.

2. Stop Losses If you feel the market correction coming, you can put in some stop loss orders. The good news is that your portfolio should have nice increases across the board. Put in a stop loss sell order on some of your bigger holdings which have had a nice runup. By doing this, your broker will automatically sell some of your positions in the event of a correction, and give you cash available to put back into the market when it stabilizes

3. Put Options If you really are losing sleep about a market correctoin and still want to put a floor under your portfolio, investigate buying a put option on one of the big market indexes. Put options give you the right to sell a stock, and profit when a stock (or in this case an index) goes down. Many people call it portfolio insurance.

Obviously, there are plenty of reasons to think that the market has continued upside. The smart investor, however, should think about how their portfolio is positioned, and ensure that there is some downside protection. It may cost some money to put these transactions in place, but the benefits are many. A well diversified portfolio with downside protection can help you invest confidently, and not worry at night!