Market crashes happen when we least expect them.
In fact, one of the many indicators of potential crashes is the one thing every investor wants: soaring share prices.
That's what makes crashes so devastating. Your portfolio is growing. Every stock you buy seems to be a winner. You might even be taking more speculative positions to juice your gains.
Then the bottom falls out.
Investors panic. Billions of dollars flow out of stocks. Your portfolio is down 30%, 40%, maybe even 50% from what it was just weeks earlier.
It doesn't have to be that way.
And you don't have to sacrifice potential gains to protect yourself either.
Whether your market crash warning signs are lighting up or you're looking to sleep a little easier at night knowing you're protected, we've got you covered with the most comprehensive guide to protecting your money on the Internet.
Even better, we'll show how you can do even more than just protect your cash. You can bank a profit on a downturn too.
Before you do anything else, make sure your current portfolio is positioned to take on any volatility ahead. You can do this by selling stocks that weigh you down, setting stop-loss orders, and adding alternative investments like gold and cryptocurrency that act as hedges against stock market drops.
We'll go into each of these in detail in the following sections, starting with the most obvious: Sell your bad stocks.
Now is an excellent time to go through your portfolio and examine all your positions.
This is a good time to trim speculative positions. That little-known stock you bought on hopes of a breakout during good times could become dead weight during a downturn.
It's also a good time to take a hard look at your long positions.
Why did you buy this stock or fund? Do you still love it?
If you consider the stock to be a long-term holding and do not love it anymore, it should probably not be a long-term holding. Now is a good exit point.
You can treat a stock you merely like as a trade. Consider setting a trailing stop or selling call options against the shares to bring in cash.
You want to love your long-term holdings like Charlie Munger of Berkshire Hathaway loves his Costco Wholesale Corp. (NASDAQ: COST) shares. He once said Costco is "one of the most admirable capitalistic institutions in the world."
That is, when it comes to the stocks you love, like Charlie loves Costco, do nothing.
Of course, there are certain stocks that everyone should run away from immediately. Whether you took a flier on a turnaround story or a stock you've held for years is under new management, toxic stocks can turn up in just about any investor's portfolio.
These 19 stocks are like poison for portfolios, and far too many investors are holding them without even knowing. Click here to learn more.
As for the stocks you want to keep, you can also keep them from hurting you with trailing stops...
Set stops on those stocks you are merely flirting with or dating. If the market drops and triggers your stops, you can use the funds to reinvest in the ones you love.
Stops are an easy and effective way to mitigate risk and boost gains.
And yet, a surprisingly large group of individual investors don't use them. Some have never even heard the importance of trailing stops explained.
If you're one of those, don't worry. It's not too complicated.
Simply, setting stops is necessary "portfolio maintenance." Like cleaning your gutters or changing the oil in your car, they keep your investment portfolio running smoothly - and protect it from devastating losses.
Here are two ways to do it with stop-loss orders and trailing stops...
Stop-Loss Orders: Know When to Cut Your Losses
A stop-loss is an order, either formally placed with your broker or a mental reminder, to sell your stock when it declines to a certain price threshold. It's what you have calculated as the maximum loss you are willing to bear.
Usually, the stop is based on a percentage of your purchase price, but it can also be an absolute dollar amount (a "chandelier stop").
You can easily put stops in place when you buy stock on your broker's website. If the price of your shares declines to the stop level, it becomes a market order and triggers an automatic sale of your shares.
You can also just set an alert on whatever portfolio-tracking website you use. If the stock reaches that price, you can make an instant decision on whether to cut it loose or keep it (a "mental" stop).
Most investors use stop-losses for one simple reason: If your stock doesn't rise as you had hoped it would, stop-losses limit your potential losses.
Sure, it's true that if you are diligent in using stop-loss orders, you can be "stopped out" of what could end up being a very good stock - if the stock takes a temporary nose-dive. But you can always buy back in.
The actual percentage is up to you and depends on your personal risk tolerance. Very conservative investors may want to place their stops at 10% to 15% below their purchase prices. Moderate risk takers might set stop-losses at 15% to 25%. Finally, aggressive investors, who have a longer time frame and don't panic at short-term losses, may set their stops at 25% to 35% of their purchase prices.
In non-volatile markets, a 20% stop is sufficient for most stocks. However, if the company operates in a fairly volatile industry (like biotech or tech), a stop up to 35% may be desired.
Here's how a stop-loss order works:
Let's say you bought Apple Inc. (NASDAQ: AAPL) stock in July 2012 at $613 per share, and you set a 10% stop. You would have been "stopped out" when Apple fell to $551.7 in November 2012 (10% or $61.30 less, in this case, than you paid for it), thereby capping your losses and protecting yourself in case the stock goes into a free fall.
But in a hearty bull market, if you use a regular stop-loss, you will leave money on the table.
And this is where trailing stops come in...
Trailing Stops Explained: Don't Leave Money on the Table
A regular stop-loss is based on the absolute value of your purchase price. A trailing stop, however, automatically adjusts your stop-loss so that it continues to move up as the price of your stock rises.
For example, let's say you again bought Apple stock, but you waited and bought it at $391 a share in April 2013. You set your trailing stop at 10%. When the shares hit $463 in May, your stop moved up to $416.70 (10% of $463 = $46.30, and $463 - $46.30 = $416.70). When the shares climbed to $520 sometime later, your stop went to $468 (10% of $520 = $52, and $520 - $52 = $468).
So your shares have run up to $520. That means you have now locked in gains of $77 - even if the shares fall to $468 and your stop kicks in.
You paid $391, and if the shares fall and you sell at $468, voila! You've locked in $77 in profits, and you didn't have to lose any sleep because your stock took a dive!
Of course, if you sold Apple at $520, you would have made $129 ($520--$391, your original price). But where would be the fun in that? You might miss out on a lot more profit, if the shares continue to climb.
When you use a trailing stop, you are taking some of your profits off the table - money that you know is in the bag. Without the stop, Apple could free fall again, and you could be stuck with losses.
You can set your stops as "good 'til canceled" (GTC), and you can also adjust them whenever you want. If the market gets too volatile for your tastes, just tighten up your stops.
Trailing stops offer investors flexibility and help create investing discipline. They help take the emotion out of the process, in addition to the constant uncertainty of "should I stay or should I go?"
Trailing stops are easy to set, monitor, and use. So use stops, limit your losses, and protect your profits!
Once you have that in place, you can look to alternative assets.
Smart investors know that few assets have held their value longer throughout history than gold and silver.
That's one of the reasons gold and silver are universally regarded as the best safe-haven investments. They are hard, tangible assets that cannot suddenly become worthless due to trading manipulation or panic-driven overselling.
Today, you have the same opportunity in cryptocurrencies - like Bitcoin, which is often hailed as "digital gold" for how it behaves. Like gold, the value of Bitcoin increases as cash weakens.
It's much more complex than that, and there are key differences between gold and crypto. That's why we recommend you learn about both and determine for yourself an ideal percentage of each to hold.
We will start with the commodities.
How to Invest in Gold and Silver
Gold and silver investments aren't meant to be played for quick or explosive gains. They go hand in hand with other precious metal investments as a way to diversify and provide an asset uncorrelated to the broader market movements.
While a massive market correction can drive down all share prices, gold and silver prices are driven by factors such as geopolitical events, central bank activities, and interest rates.
There are technical indicators that point to a price rise or drop in gold and silver, but the best investing approach is still to think of them as a fixture in your portfolio - there to act as insurance against shocks.
There are many vehicles through which you can own gold and silver:
Many gold and silver enthusiasts like the tangibility factor in owning physical gold and silver.
However, physical ownership isn't for everyone. That comes with its own risks and liquidity or logistic issues. You'll need insurance and a place to keep them, including security.
That's why we like to use stocks and ETFs to gain exposure to metals.
Gold and Silver ETFs
Gold and silver ETFs give you all the advantages of investing without the burden of storage.
SPDR Gold Trust (NYSE Arca: GLD) replicates the price of gold and is the largest ETF backed by physical gold. It's the closest thing to investing in the commodity without owning it physically. The biggest advantage over physical gold is its liquidity - it's very easily bought and sold.
The most popular silver ETF is the iShares Silver Trust ETF (NYSE Arca: SLV). The fund backs its shares with about $6 billion in physical silver in JPMorgan Chase & Co. (NYSE: JPM) vaults in London and New York. Each share represents the price of about one ounce of silver.
There are many ETFs you can look into, each trying to find advantage through varying degrees of innovation in how they track the performance of silver or gold.
ETFs allow investors to get precious metals exposure via a variety of funds that either track futures contracts - like UGL and AGQ - or own physical bullion. But it's important to remember that, for all intents and purposes, these are essentially stocks. In the same way you can't redeem a company's hard assets by buying shares, you can't redeem physical gold and silver from ETFs - unless you hold one of the rare funds like OUNZ that specifically allow you to redeem shares.
Beyond ETFs that just represent physical gold and silver, or derivatives, there is another approach to investing in these metals through stocks that can also be very advantageous.
Gold and silver stocks let you invest directly in gold and silver mining companies. This is, of course, different from investing in bullion or an ETF that tries to emulate its price.
However, gold stocks do naturally react to changes in the gold price. As precious metals shoot up, so, inevitably, will profits for the companies that produce them.
The most common way to track gold stocks as a whole is through the NYSE Gold Bugs Index (INDEXNYSEGIS: HUI). This is an index of large miners operating around the world.
Now, here's how crypto plays into the protection equation.
Bitcoin and Other Crypto
Cryptocurrency is a revolutionary way to think about money. These are purely digital assets that are completely decentralized and anonymous.
Some, like Bitcoin, are designed to be scarce, making them rise in value as more is bought. Others, like Ethereum, allow custom "smart contracts" between two parties through blockchain.
Our resident Silicon Valley insider is recommending three under-the-radar digital coins as today's BEST crypto buys.
To learn about all three - and discover how even a small stake could transform into a small fortune in 2021 - click here.
These popular forms of investing are turning into a type of "digital gold," where the assets retain their value independent of what's happening in the stock market.
Bitcoin and Ethereum are the two largest cryptocurrencies by market cap.
Cryptocurrency is still much riskier than gold or any other safe-haven asset. It is mostly unregulated, meaning users are encouraged to go out of their way to keep their crypto secure.
But because it is decentralized, crypto prices can swing opposite cash and stocks.
With the financial world embracing cryptocurrency more and more, learning how to buy Bitcoin merits serious consideration for a growing number of investors.
Rising interest from Wall Street types such as hedge fund manager Paul Tudor Jones and Stan Druckenmiller, as well as a series of multimillion-dollar purchases by companies like business analytics firm MicroStrategy Inc. (NASDAQ: MSTR), have helped legitimize the idea of Bitcoin as an investible asset.
But buying Bitcoin works a little differently than buying stocks. Investors have a dizzying array of Bitcoin-buying options to choose from. For those new to crypto investing, it can seem overwhelming.
As with most things, investing in crypto is easier than it looks. Remember: You don't have to master the many technical nuances of blockchain to own it.
Last thing: The big upside potential is super enticing. But this major rule of growth investing still stands: Make sure you only invest as much as you can afford to lose. Use Bitcoin and other cryptocurrencies as an alternative asset, something that has potential to go higher than stocks or as a hedge against cash losing value.
Now, let's look at a few ways you can buy crypto...
How to Buy Crypto from an Exchange
You can open an account on a crypto exchange similar to how you would a Robinhood or TD Ameritrade. Download the app, and you'll be prompted to provide some personal information, such as your birthday, home address, and Social Security number. Some also require you to upload images of personal identification such as a driver's license or a passport.
All of this is required by U.S. anti-money laundering (AML) and know your customer (KYC) laws. Exchanges must follow these rules to move money around and interact with U.S. banks.
While there are dozens of apps and sites that let you buy crypto, we'll show you the two easiest ways to invest in these currencies.
Coinbase is the easiest, safest way to buy Bitcoin for newcomers. You can link your account to a checking account to move U.S. dollars in for buying Bitcoin and back out when you sell. The website walks you through the steps and makes buying and selling many different cryptocurrencies about as easy as it can be.
The Robinhood app has added crypto to its offerings state by state as the firm obtained regulatory approval (four blocked states remain: Hawaii, New Hampshire, Nevada, and West Virginia). The biggest draw here is no-fee trading. It's easy to link Robinhood to your bank account to provide funding. While best known for its app, Robinhood has a pretty good website as well. And unlike other crypto exchanges, you can use Robinhood to trade stocks.
Crypto is just one other way to protect your stock portfolio from a broad market drop.
Finally, here's how you can really take vengeance on falling stocks...
Now we get to the fun part.
If your portfolio is full of only stocks you love, you've set trailing stops, and you've hedged your portfolio with alternative assets, you might start thinking about ways to make a positive return in a down market.
There are a few ways to do that.
You can invest in inverse ETFs, which are funds that directly "mirror" the movement of certain groups of stocks.
You can find out which stocks have a great chance of rebounding and grab them at a discount.
Or, you can make money trading options.
Let's start with inverse ETFs.
Putting a small percentage of your portfolio into an "insurance" play in case the worst happens is a smart move.
One of the best ways to beat a market reversal is by investing in an asset class that does the opposite of what the market does. That's an inverse exchange-traded fund (ETF), otherwise known as a "short" or "bear" ETF.
These ETFs contain a variety of stocks and bonds that move inversely to the market. Anyone with a brokerage account can invest in them.
And with inverse funds, the expense ratio is often less than 2%. Of course, these aren't "set it and forget it" plays. They'll lose value as long as stocks climb, so you want to be strategic.
But if the market does tumble, these shares will pop higher, giving you a tidy profit.
Here are some of the top inverse funds to invest in.
ProShares Short S&P 500
This ETF is what it sounds like. When you invest, you are expecting the S&P 500 to tank. That is, if the 500 biggest companies in the United States struggle on average, this fund moves in the opposite direction.
This is also one of the biggest inverse funds out there, with over $4 billion in assets. This one comes in at $21.27 per share today.
But you aren't limited to ETFs based on indexes...
MicroSectors FANG + Index Inverse ETN
If the tech sector is in trouble, you can inverse the biggest tech stocks in the United States with MicroSectors FANG + Index 3X Leveraged (NYSEArca: GNAF). This one is a play on stocks like Facebook Inc. (NASDAQ: FB), Amazon.com Inc. (NASDAQ: AMZN), and Alphabet Inc. (NASDAQ: GOOGL) going lower.
Congress has been conducting antitrust hearings into FAANG stocks on and off. We could be getting closer to seeing more regulation on these firms. Depending on how that goes, these companies could be in for a rude awakening.
With these stocks soaring near all-time highs, a correction wouldn't be unheard of.
Invesco DB U.S. Dollar Index Bearish Fund
This one is not a broad market index or sector - it's the U.S. dollar itself.
Invesco DB U.S. Dollar Index Bearish Fund (NYSEArca: UDN) mirrors Treasury bonds. That means, if the dollar declines, this fund goes up. And the dollar is already at a 10-year low.
The dollar could also be viewed as less reliable down the road. If economic concerns prevail, it could continue to lose value on the international stage.
That would make this fund potentially worthwhile at its current price.
For more flexibility and higher upside potential, we turn to individual stocks...
If you walk into the grocery store and steak is on sale for 30% less than last week, you're in luck. Assuming you are not a vegan or vegetarian, you will load up on steaks and fire up the grill.
Use the cash from selling stocks you like to buy the stocks you love at 20% or 30% off.
When markets are crashing, start building a list of stocks that you love at lower prices right now.
Maybe a stock roared out of the 2008 financial crisis unscathed. Maybe it did the same in the COVID-19 crash. Put it on the list!
There were a few of those in the 2020 COVID-19 drop.
For instance, Apple Inc. (NASDAQ: AAPL) fell 22% from an all-time high in March 2020. Then, it more than doubled over the next year.
Home Depot Inc. (NYSE: HD) also fell 18% in the March 2020 plummet. It gained back 40% over the following 12 months.
These are only some of the best-known examples of stocks that have been resilient in tough times.
If you need help creating your "buy list," we've uncovered 31 stocks every American should consider buying right now - see them all in this free video.
Now, if your risk tolerance is a bit higher than most, you may want to consider trading options for even faster profit.
The beauty of options trading is you can make money no matter which direction stocks are moving. That gives you the opportunity to not only hedge your stock positions, but to speculate on contracts with huge upside during a downturn.
Many people miss out on these profits because they believe options are too complex or risky, or that you need to be a professional to access them.
This couldn't be further from the truth.
While there are a few more moving parts to trading options than buying and selling stocks, options can be intuitive to trade and can even reduce your risk. And just about anyone with a brokerage account can do it.
All you have to do is get approved by your digital broker by answering a few simple questions about your trading history. These are usually not much more complicated than entering some personal information and describing your experience level with trading. It should take no more than five minutes.
Here's how options can help you in a bear market.
Buy Puts
Buying put options is the most straightforward options play for when stocks are heading down.
Put options give you the right to sell a certain stock at a certain price by a certain date. So when stocks are tumbling, having a contract that says you can sell a stock for an above market price can be pretty lucrative.
Let's take a look at how Tom Gentile alerted readers to a tremendous opportunity to profit from the fall of cruise lines during the COVID-19 crash.
At the start of February, Tom noticed Carnival Corp. (NYSE: CCL) had lost a whole 15% on the year, so he pinpointed an out-of-the-money put option set to expire 90 days out. Readers who listened made 306% in just a couple weeks.
If they didn't sell then, some readers could have made nearly 1,000% on the same options contract.
But that's just one options trade in a gold mine of others in a down market.
Find out more about Tom's strategy using his proprietary Money Calendar system. Tom looks for three things before greenlighting a trade to share with his subscribers: It will take less than 30 days, it has the potential to double your money, and it won't cost more than $500 to get into.
Find out more right here.
If you're comfortable with how put options work and have a slightly higher risk tolerance, writing and selling puts is an even bigger way to profit.
Sell Puts
This is strategy goes hand in hand with your stock "shopping list."
When you sell, or write, a put contract, you're on the opposite side of the trade as the put buyer. You collect the cost of the contract right away, and you're on the hook for buying the stock at the contract price if the price of the stock drops below that set price.
The reason selling puts can be such a lucrative strategy during a downturn is you can name your price on stocks you'd love to own. Not only do you get paid to write the contract, but your risk is that you'll wind up buying the stock at a price you think is great. You can treat it like a win-win.
And if stocks don't fall far enough to trigger action on the contract, you get to keep the money the buyer paid for the contract. It can be a great deal if you use it this way.
For instance, Tom pocketed $14,288 courtesy of Microsoft Corp. (NASDAQ: MSFT) after he sold puts on the stock and the price kept climbing. However, even if the stock went down past the strike and the put was exercised, Tom would still have bought one of the best tech stocks in the world on the dip.
It's a win-win.
And that's the main lesson for writing puts. When you're selling a put option, make sure the underlying stock is also something you'd want to own at a discount.
Sell a put option with a strike price you wouldn't mind paying for 100 shares.
If the stock loses value, you'll just be buying it at the discount you wanted. If the price stays the same or rises, your profit is the premium.
This puts you in control of every aspect of the trade. You measure exactly how much money you want to spend before diving in.
After that, it's just a matter of knowing which options to look at.
But you don't need to stop there.
Learn how to use even more trading strategies to profit no matter what the market is doing...
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