Stay In Market But Protect Downside

February 2018 has been a month of huge volatility for the US stock market and the market also touched correction level with a 10% decline from the recent peak, though it has recovered somewhat.

I started my first article of the year with Market Crash in 2018, hope I don’t have people cursing at me now.

To be clear, the 10% correction from the peak is almost insignificant if you look at it from the right perspective, as it is been climbing for a long time.

However, I know that a number of people have been badly hit and some even with their trading account totally wiped out.

How did this happen given that the market is down “just” 10%? I don’t know the full story but surely they have gone to dangerous territories, involving themselves with high risk instruments, leveraging too much into margins trading and not managing their portfolio wisely.

What I have also observed is that some of these people have been “boasting” of their tremendous gains just before this episode.

It is a sad incident and I hope they can recover from this soon.

How To Stay In The Market Safely

I am not going to predict when the market is going to totally crash, and nobody knows.

We have also heard advice to stay in the market and not totally going on cash as the market may just continue to climb for a few years!


Stay in market but protect downside

But how do we do it safely? While I have gone majority cash, psychologically I was slightly shaken with the recent correction as you see your P/L statement turning more and more negative.

Well, for me the answer lies with protecting the downside while letting the upside reign freely.

I won’t forget value investing principles in the meantime, and to portfolio size.

There are a few ways to protect your downside. For those of you familiar with options (and you can read Using Stock Options to Generate Monthly Income), essentially you can buy a put option for the trades you do. This “insurance” you acquire is for situations when the market drops by 10%, 15% whatever scenario you are planning for.

Your return will be reduced with this premium expense, but you will sleep well as you know what’s the worst case scenario and you will have capital protection to take advantage of the bear market.

Stay safe and happy investing.

Wishing all our readers Happy Lunar New Year.

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