How To Protect Your Portfolio

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Over the last few sessions, the S&P 500 (^GSPC) dropped more that 3%, causing some panic among investors who are wondering whether this is the beginning of a bear market.

Conversing with fellow investors over the last few days, I often discouraged an extremist approach to investments, i.e. holding uncompromising views of a security’s rise or fall. Instead, I promote a more evolved approach that takes into account all the circumstances (including risks), and then decides whether the security truly represents an investment-worthy candidate. In doing so, an investor prepares himself for different outcomes, which helps him manage his risk more effectively.

Not only is it important to generate gains but also to protect them. In view of these fears, I decided to pen this piece to discuss a few ways that would help investors cope with market uncertainties. While here are numerous ways to approach this, some of the most common include buying protection in form of put options or inverse exchange traded fund (ETF).

The notion of purchasing protection is usually triggered by fear of one or more negative developments over the short term that will adversely impact your portfolio. To begin with, it is important to recognize the fear for which you are considering the purchase of protection: Are you fearful of a short-term volatility in the market? Are you expecting a correction in a stock’s price?

Stock related fears
This is perhaps the greatest fear of a retail investor, who often

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