Stock market downturn? How to cope.
Did you really think the bull market of 2013 could last forever? Recently, those rose-colored glasses might have been knocked off. 聽But does your portfolio allocation reflect that?
If the majority of your money is invested in U.S. stocks (or ETFs or mutual funds composed of U.S. stocks), you might want to consider one of these three strategies:
- Reallocate.聽 Sell some stocks or funds that have gone up a lot and invest the proceeds in a diversified portfolio of various asset classes. Depending on your time horizon and risk tolerance, these could include some combination of international developed country stocks, emerging market stocks, REITs, commodities and bonds. If you can鈥檛 bear to sell most of your holdings due to capital gains tax implications, then consider the next two strategies.
- Buy insurance.聽 A quick and easy way to hedge your portfolio against a market downturn is to buy聽on a major market index such as the S&P 500. If the market corrects, the value of your put options should partially offset the loss of the equities in your portfolio. If the market stays high, you simply lose what you paid for the insurance.聽 It鈥檚 like owning insurance on your home, where you pay a premium to protect the value of your asset.
- Generate income from your stock.聽 Many people shift to dividend-payers when they fear a market downturn because of the ability to collect dividend income while waiting for the market to improve. In addition to receiving dividend income, you can also receive option premium income by聽聽on stocks or ETFs you already own. In exchange for agreeing to sell your securities at a certain price sometime in the future, you receive income in your account today. The income you generate with this strategy serves to partially or fully offset declining stock prices.
The default option鈥攄oing nothing to adjust to a changing market environment鈥攊s to stick with the 鈥渂uy and hold鈥� strategy, which will likely bear fruit over the long term. But if you don鈥檛 want to suffer significant losses in the short term, it might be worth your while to execute a different strategy.
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