8 Smart Portfolio Protection Strategies for Volatile Times

When times are uncertain, these smart strategies will make you feel more secure about your investments.
Updated April 3, 2023
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The stock market can provide investors with strong returns in the long run. For example, a portfolio made up entirely of stocks would have returned more than 10% per year from 1926 to 2019, on average. While that is much higher than recent inflation rates, stock market returns can be volatile in the short term.

Those ebbs and flows can be challenging, especially if you’re nearing retirement. Chances are, you’ll want to ensure your portfolio will continue to grow, even when financial markets are struggling. Here are eight portfolio management strategies that could help protect your investment portfolio during a volatile market.

Diversify your portfolio

A diversified portfolio is one of the best (and easiest) ways to mitigate the level of risk you assume as an investor. While it’s not possible to eliminate risk entirely, learning how to diversify your portfolio could help reduce your risk while maintaining better returns based on your risk tolerance.

Diversification is the idea behind the popular Modern Portfolio Theory (MPT). Since some investors are risk-averse, MPT tries to minimize risk by holding assets that are not correlated to market performance. 

For example, an MPT strategy would invest in stocks from different industries such as technology, real estate, and energy. While some of these industries perform well when the economy is strong, others can fare better when the economy is struggling.

Buy dividend-paying investments

Publicly-traded companies often pay dividends, or a share of their profits, to their investors. Some stocks pay the same dividend quarter after quarter or even increase once a year. Companies known as dividend aristocrats have actually increased dividend payouts every year for the last 25 consecutive years.

Dividends could boost your returns overall and prove to be especially valuable during a market downturn. Dividend aristocrats continue to pay dividends and even increase them, which can be invaluable for investors who normally depend on appreciation. Many of the best investment apps make it easy to find and buy dividend-paying stocks.

Add non-correlated assets

Investing in stocks could help build your wealth in the long term, but the stock market is certain to struggle at times, especially during a financial crisis like a recession. 

Even if you invest in the entire stock market, it won’t always be enough to shield you from market volatility. During those times, investing money in other asset classes could make your portfolio more resilient.

Non-correlated assets tend to have a weak or negative correlation to the stock market. A negative correlation means that when the stock market struggles, these assets could rise in value. Assets that are weakly or negatively correlated to the stock market include:

  • Bonds
  • Real estate
  • Commodities such as precious metals, energy, and agricultural goods
  • Foreign currencies

When the stock market falls, these assets could help stem the tide somewhat. However, their negative correlation also means they may fall when the stock market rises.

Use put options as a hedge

Buying put options is a somewhat advanced strategy, but some investors use it as a hedging strategy against falling share prices. 

Put options give you the right to sell a stock at a specific price (called the strike price) anytime before a specified date. If the share price falls, you can require the person who sold you the put option (called the writer) to pay you the original strike price to offset the decline in share price.

Put options sound good in theory and could potentially be less risky than trading futures since you aren’t obligated to sell. However, because you pay a higher price for the option to sell the stock at a specified price, options are more expensive than simply buying shares outright.

Use stop losses to reduce risk

Stop losses, or stop-loss orders, are a way to help reduce the risk that a given stock will lose too much of its value. 

Essentially, you place an order to automatically sell your shares if the stock price falls below a specified price. In that sense, stop-loss orders are an alternative to options strategies. The difference is that stop losses sell your shares automatically at a certain price, while put options give you the option to sell at a certain price.

For instance, say you buy 10 shares of stock at a price of $100 each. Then you place a stop-loss order on those shares with a price of $90. If the stock price declines to $90, your portfolio will automatically try to sell your shares for $90 each. 

While you lose $10 per share, you are able to cap your losses at $10. If the price increases after you purchase the stock instead of declining, your shares won’t be sold.

Stop-losses may not always be the best long-term strategy. If the stock mentioned earlier declines to $90, it could later increase to $120. If you bought it for $100 and sold those shares for $90 with your stop-loss order, you would have missed out on that 20% growth.

Invest in principal-protected notes

Also known as structured notes, principal-protected notes allow you to earn a return when the market does well. On the other hand, you won’t lose your original investment if the market fares poorly.

With this strategy, you buy a note that tracks the performance of the S&P 500. The note is a hybrid security, typically a mixture of bonds and other investments. When the note matures, the issuer will return the full principal plus any return based on any S&P 500 return.

However, if the S&P 500 drops after the maturity period, you get your initial investment back with no loss in value. However, keep in mind that this assumes the issuer is able to pay you back; there could be a risk that they are not creditworthy in the first place.

While principal-protected assets could reduce your returns somewhat if the market does well, they also hedge your money against loss if it does poorly.

Invest in inflation-protected assets

Inflation is also a risk that investors must take into account, especially during periods when it reaches unusually high levels. High rates of inflation could erode your purchasing power, meaning your dollars will buy less and less over time.

One smart money move during inflation is to use inflation-protected assets. One example of this type of asset is Treasury Inflation-Protected Securities (TIPS). The principal of these assets increases with inflation, potentially buffering you from the effect of high prices.

However, one important note is that the price of inflation-protected assets also decreases with deflation. So, if prices are falling, the value of TIPS will fall too. TIPS are issued by TreasuryDirect, which uses the Consumer Price Index (CPI) to track inflation.

Buy government bonds

Another type of asset that has garnered more attention in recent years is government bonds, including Series I Savings Bonds. Like TIPS, I Bonds are also issued by TreasuryDirect. The reason I Bonds have gained a lot of attention recently is that they can pay attractive interest rates and are government-backed.

I Bonds do have several limitations, however:

  • Investment is capped at $10,000 per calendar year.
  • Interest rates are set every six months and may decrease in the future.
  • They must be held for at least five years; if you sell them before then, you lose the previous three months of interest.

Bottom line

Investing always involves risk, and there is no way to completely eliminate risk when you invest. You can lose money if the stock market struggles or when inflation causes your dollars to buy less. 

However, you can use risk-management strategies like investing in a wider variety of companies, buying dividend-paying stocks, and investing in assets that offer a certain return.

Your best bet is to create an investment strategy that aligns with your own risk tolerance. If you aren’t sure what that looks like, a financial advisor can help you create a strategy tailored to your financial goals.


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Author Details

Bob Haegele Bob Haegele is a seasoned personal finance writer, leveraging his bachelor's degree in information technology from Marquette University to dissect complex financial topics.

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