If the Market Crashes Again, How Can One Protect Themselves?
Some people will find this subject distasteful in a troubled economy. They may feel that making money in a troubled economy is similar to making money off the backs of others misery.
The truth is that the economy will do what the economy will do. Those who use a little insight and practical wisdom will be able to protect much of their portfolio and possibly add a little to it. Why should everyone lose together?
How does one go about protecting themselves in such a volatile economy?
Ride the Economic Roller Coaster
When the market is in a bull stage, a prudent investor will invest; when the economy goes into a bear market, the wise investor will convert his investments into cash. This very simple process will keep the investment dollars growing when times are good, and protect the hard earned assets during economic storms.
But how does one time his investments with the market? This article shows the difference between timing investments with the market. Over a five year trial using the same fund and the two types of investment styles (timing purchases and sales versus buy and hold), the difference in overall gain was over fifty percent.
There are numerous other ways to determine a bull or bear market such as CAN SLIM investing, or simply following a moving average on a popularly followed index such as the 50 day moving average on the S&P500.
Shorting the Market
Studies have shown that the ability to short the market does not adversely affect it. Of course, this does little to change the public opinion that anyone who sells stock he doesn’t own when the economic condition is already grim is a greedy opportunist. It would appear to many that such a person is promoting a free fall of the stock market.
Put Options on the Market
Another simple method to profit from a market downturn exists: Put options.
This is how a put option contract works: investor A is willing to buy 100 shares of stock ABC. He agrees to buy at the current price of 10 dollars per share. Investor B comes on the scene and makes a deal with Investor A. Investor B gets three months to shop around and find shares of ABC at a more competitive price. If he finds a better price, he will keep the spread or the difference for himself.
Investor A agrees to this and receives a small premium from investor B for this type of agreement. This is a good agreement for investor A since he is happy to buy stock ABC at 10 dollars per share, and he receives an immediate bonus in the form of a premium for writing this contract up.
Investor B is happy since if the market makes a downturn, he can snap up shares of stock ABC for less and sell it to investor A for more (10 dollars per share). Both men are happy.
As the market turns in today’s economy, put options can create a powerful hedge, or a highly leveraged means of profiting from the market without the stigma of being a Grinch that robbed all the little boys and girls of their invested dollars.
Investing in Today’s Economy
As markets turn downward, each investor should carefully analyze the amount they are willing to lose by keeping it invested. There is no sure way to protect investments, but some are far safer than others.
A diligent study of risk and reward will help each investor risk only what he can afford to lose. Using the hedging and profitable methods outlined above should assist some to protect and increase their assets even if the economy and stock market should fall further in 2010.