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How To Protect Your Portfolio in a Volatile Market

During times of high volatility and turmoil, learning how to protect your portfolio is key to coming out unscathed.

By Riley Raul ReesePublished 6 years ago 5 min read

Trump's effect on the economy has not been a good one. His trade war with China will have millions paying more for products, and his policies have already started to show a stalling effect on businesses.

Experts agree that we're in for a rough ride, and that means that markets will be more volatile than we've seen them be for a long while. During these trying times, it's important to gear up for the rockier moments.

In order to weather the foul markets ahead, it's crucial to know how to protect your portfolio during high volatility—as well as a market crash. Here are some tips for beginners who want to batten down the hatches.

The easiest way to protect your portfolio during moments of high volatility is to diversify your portfolio. The more diverse your portfolio is, the better the results will be and the more equipped you will be when markets really start to suffer.

However, buying up a bunch of different stocks isn't always wise. Individual stocks are a risky endeavor in a bear market. A better option would be ETFs, or Exchange Traded Funds.

These are stock-like investments that are composed of a bunch of slices of different stocks. Like regular company stocks, these are publicly traded. Since a single share of an ETF has tons of different companies, you lose less if one company goes under.

These are managed by professionals who also are able to swap investments in the fund if one proves to be a major loser. So, it's a lot of peace of mind and diversity for a small price. Investment apps for beginners, like Stash, let you invest in a variety of ETFs for as little as $5.

Keep cash on hand.

If you want to protect your portfolio and also increase its value, the best way to do it is to keep cash on hand in the form of savings. This is something you should always strive to do, regardless of how steady the economy is.

By having more cash on hand, you cushion yourself from the potential of unemployment when the market starts to plummet while also giving yourself the opportunity to buy stocks on a discount from what they're like during more bullish times.

Additionally, cash is a good way to increase your portfolio diversification.

Inverse ETFs are considered to be shaky investment vehicles, but if you're anticipating a market crash, they may be a wise choice that will protect your portfolio. These are ETFs that are designed to react opposite to the behavior of market indexes.

So, an inverse ETF based on the S&P 500 will increase when the S&P 500 market decreases. An inverse ETF based on the Dow Jones will climb when the Dow Jones gets volatile and crashes.

Though these aren't a cure-all to market volatility, they definitely could be a good way to hedge your bets. Apps like Robinhood sell them—and many are pretty cheap, too.

Consider getting VIX-tracking ETFs.

One particular kind of ETF you might want to consider when trying to protect your portfolio is a VIX-tracking ETF. VIX-tracking ETFs are specialized funds that track volatility and therefore cushion the blow of crazy stock fluctuations.

These ETFs are based on CBOE Volatility Index. They're not exactly for the faint of heart, but they offer a major opportunity to hedge bets against market crashes.

If you're noticing that the stock market's looking increasingly bearish, then it makes sense to avoid buying stocks that are risky or otherwise won't work well with volatility.

When the market is volatile, it's very likely that job losses will ensue. When people lose jobs, they can't buy. When people can't buy, most luxury stocks and entertainment stocks will plummet. Necessities, such as food and electricity, won't fluctuate as much.

A lot of investors call this investing in defensive stocks.

In the event of using a robo-advisor like Betterment, the program might actually take care of selling off losing stocks for you. However, it's a good idea to check just in case.

Set limit orders.

Limit orders can help you protect your portfolio and even profit during times of volatility. The way this works is simple. Limit orders are placed when you want to instantly sell or buy at a certain price. So, if you set a limit order to buy low and sell higher, you end up making a profit.

In times of extreme turmoil, using limit orders can be a good way to create a stop loss. Should you have a crash, a wisely-set limit order can reduce loss immensely. This works well with both short term and long term investments.

Most people, during bull markets, want to invest in stocks. During bear markets, most investors will try to find low-risk investments outside of stocks. Things like real estate, government bonds, and index funds are typically smarter.

Apps like iBillionaire offer good blends of conservative investments that are ideal for rougher times. The key thing to remember is that these investments tend to have lower returns than aggressive stocks. However, they are a safer bet.

If you're very scared of the volatility, the best way to protect your portfolio is to switch to investments that offer a fixed income, such as a corporate bond, a CD ladder, or a tax lien.

Stop checking your stocks so frequently.

Panic selling is far more tempting when you have a stock market that's been shifting from side to side. When you see that stuff going on too much, you often will get tempted to protect your portfolio by selling everything. This isn't a good route, though.

A good investor invests with their head, not their heart. To avoid getting emotional over stocks, try to avoid checking them.

Stock market volatility never happens solo. When stock markets start to shake, jobs often get lost. To make sure that you weather the storm, one of the best investments you can make is to pay down your debts.

Most people don't realize that this is a good way to protect your portfolio, too. By reducing debt, you avoid having to shell out cash on interest—and are able to invest more money, on cheaper stocks, during times when the economy isn't so nice.

Apps like Mint can help with that.

Lastly, learn how to bolster your tax return.

The economy might be bad, but that doesn't mean that you can't enjoy tax benefits. Learn what's deductible, and learn how to work with your tax bracket. This small trick can pay off by April 15, and can even help you protect your portfolio from loss.


About the Creator

Riley Raul Reese

Riley Reese is comic book fanatic who loves anything that has to do with science-fiction, anime, action movies, and Monster Energy drink.

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