How to Hedge Against a Market Correction
Markets hit all-time highs.
Optimism and confidence in markets soared to unbelievable heights.
There was nothing but euphoria. Nothing could stop the rally.
Investors were pouring money into stocks on the idea of an improving economy. Unemployment was at historic lows. Thousands of people were becoming millionaires every day. Investors were mortgaging their homes just for a piece of the market action.
Stocks quickly became a “sure thing.” Investors couldn’t lose.
And then 1929 hit, and wiped it all out.
Over the last few years, we saw much of the same euphoria, and the idea that nothing could stop the rally higher. And while we’re not saying we’ll see a near-term repeat of 1929, we are saying that very few of us are really well prepared for even the possibility.
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In early February 2018, the Dow Jones plummeted 1,000 points. On top of that, analysts began to argue we could see a 10% correction, or a drop of 2,500 points, which should scare you. What should also scare you is if your portfolio isn’t hedged against the possibility of such a decline.
In fact, to be very honest with you, it’d be downright stupid not to protect your portfolio here.
Granted, no one can time a potential correction. But we still prepare for it just in case.
We also have to remember that bull markets are born in pessimism and end in euphoria, just as we saw in 1929 and 2008. We must also remember that when analysts get far too bullish as they just were, it happens near market tops, not near market bottoms.
As a matter of fact, the last time analysts were as bullish as they were in 2018 it was 2008.
Consider that the next time you leave your portfolio unprotected.
Some of the best ways to hedge for market downside at any time is with these four opportunities.
- No. 1 – Consider moving some of your portfolio into cash
- No. 2 – Trade the potential for Volatility by buying Volatility Index (VIX) calls
- No. 3 –Buy a put option on the NASDAQ, the DIA or even the SPY
- No. 4 – We can even hedge our long positions with ETFs, as well, including the Pro Shares Short S&P 500 ETF (SH), the Pro Shares Ultra Short S&P 500 (SDS) and even the Pro Shares Short Russell 2000 (RWM).
We’re not saying the markets could crash as they did in 1929.
What we are saying is that it’s never safe to leave your money unprotected without a hedge.
Stocks just don’t go up. They come down just as fast.
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