Five Ways Protect Your Wealth in a Stock Market Crash

The Sirens and Ulysses 

  1. Asset Allocation

Strategic asset allocation is a sensible and practical way to invest your money and protect your wealth. Plan in advance the mix of stocks and bonds for your portfolio. No need to predict the short-term direction of the stock market. For a deep dive into portfolio protection and asset allocation, I recommend Dynamic Strategies for Asset Allocation by Perold and Sharpe.

Now consider, for example, a recent retiree invests her nest egg 50% in low-cost stock market ETFs and 50% in laddered US Treasury Notes, TIPS, and CDs. If the stock market were to crash, she doesn’t need to do anything. Most of her money is invested safe and secure in US government-guaranteed assets. And going forward her stocks could recover all their loss and ultimately generate a high return.

Avoid overreacting to random changes in stock prices. Follow your plan of strategic asset allocation. Turn off CNBC and consider for inspiration The Sirens and Ulysses as shown in the image at the top of this post.

  1. Market Timing

Timing the market is a fool’s errand, and for many an unfortunate investor, it’s an irresistible siren’s song. Remember, no one knows when the stock market will sink or shoot higher. The stock market doesn’t work like that. Not one billionaire on the Forbes 400 list made his billions by timing the market. Avoid.

  1. Stop-Loss Orders

Stop-loss orders don’t work.  And by the way, “stop-loss order” is a misnomer. The correct terminology is “stop-order.” In the real-world, stop-orders lose money. They don’t stop them. I’ve often remarked that “stop-loss order” should be renamed “cause-loss order.”

  1. Structured Products 

Don’t buy investments from a product-pusher.  Equity-index index insurance products, including annuities and life insurance, are a lousy investment. So are stock market-linked CDs and structured notes.  Why? Because contrary to what’s promised by product-pushers, if you purchase a structured product and then sell it when stocks crash, you will lose money. Strategic asset allocation is a straightforward, proven wealth protection strategy that’s low-cost, transparent and tax-efficient.

  1. Put Options

If you feel you must do something (SELL NOW!), consider purchasing a put option instead. Panicked liquidation of your strategic stock portfolio is a bad move. On the other hand, put options bought right before stocks crash, can earn a stunning return on a small investment. We’re talking 100% or even 1000% returns and more. Trouble is if stocks go up, not down, you lose all the money you invested in the options. The upside is you still hold your stock portfolio.

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