For Investors, ‘Portfolio Insurance’ Against Market Declines

John F. Wasik writes about different strategies investors can utilize to protect their investments against market volatility in a recent article. It begins as follows:

Whenever the stock market shows a bad hand, as it did in the third quarter, nearly all stock investors hope they have something akin to an ace in the hole.

Investing professionals call this favored-card strategy “portfolio insurance,” a way of hedging against the brutal loss of a broad-based market decline. In recent years, more specialized investments to stem market downturns have become available to individual investors.

Although portfolio-protection strategies are complicated and none work perfectly, they can be widely employed to protect wealth over time. But shielding against future loss in retirement income and addressing short-term volatility are often two different missions that have varying costs and results.

What most unnerves many investors is volatility, the day-to-day sell-offs that can shave up to 3 percent off stock prices; this happened more than once in August. To safeguard against those Tilt-A-Whirl rides, people can turn to investments that actually reward them in the most skittish periods. That approach would have paid off in August, when the Standard & Poor’s 500-stock index lost 6 percent, and in September, when it lost nearly 3 percent.

Read the full article from the New York Times here.

Posted by Logan Davis, Associate Editor, Wealth Strategies Journal.

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