How to Protect Your Portfolio From a Market Crash

No one wants to hear bad news, but, when it comes to stock/currency markets, it is something unavoidable. It's also natural, since markets and economies go through cycles of boom and bust. Therefore, for every bull market that we enjoy, there is a potential for a bear skulk somewhere in the future. This is a good reason, why it’s important to have a plan in place in case of a downturn. There is one thing that nobody wants to have when it comes to investing/trading, surprises. An unpredicted down market or crash is something that can lead to unwanted stress and change your financial goals once for all. Every investor/trader knows, that it is impossible to completely avoid the risk when investing in the markets, but fortunately, there are a few things that you can do to protect your portfolio from a market crash.

• A simple and a good advice is not to look at your portfolio all the time. Stop listening to everyone and focus on what you can really control, which is your spending and saving. Stocks/currencies that no longer meet strong investment criteria are likely to decline the most in a market fall. On the other hand a declining market can offer the opportunity to add your long-term investment portfolio at a lower price point. Occasionally bull markets are an opportunity to buy stocks/currencies while they are "on sale". As Warren Buffett observed, it is profitable to be greedy when others are fearful".

• A well-diversified portfolio will exceed an intensive one. Diversifying your portfolio is probably a good thing to do in order to protect your investments from bear markets. But, it is not only about by owning a huge number of investments in more than one asset class, it is about owning different investments or to better say, investments that have different types of risks. If, stocks/currencies is all that you own, it means that the base risk is the same. Having different type of investments with different types of risks avoids market crash taking your whole plan down with it.

• Selling some stocks/currencies and buying some bonds will help you rebalance. Waiting for stocks/currencies to correct would bring your portfolio back into adjustment. When there is a disturbance in the markets, most professional traders will quickly move to cash or cash equivalents. This is something you may want to do as well, get back quickly and then get back in when prices are much lower. It is smart to keep at least a small part of your investments in something that is not going to fall with the markets. If, you own stocks/currencies that you think are going to fall, you could start selling short and then buy it back. It is easier to do this, when you own stocks/currencies that you're going to short, because in case if market moves against you, you can simply sell your stocks, and pay the difference in price in cash.

• In trading you should learn what you need to do, in order to be successful, it is all about respecting key rules to minimize stress. Even though you may not be able to stay away from an emotional response, you can still manage it. Practicing mindfulness helps us reduce stress, changes brain regions associated with fear and therefore improves our internal control over emotions, helping us to be more aware of opportunities and dangers when we are in challenging situations such as declining stock markets. Mindfulness helps investors/traders maintain an even emotional collapse and make better investment/trading decisions, that's why it is really good mental skill that investors/traders should start learning.

Related Articles

Transform your trading with - AiX