Hedging a Stock Market Crash
Stock Market Crash Investing Strategies
You have to know that when housing markets or stock markets near their peak prices, that a downtrend is on the horizon.
Like most people, investors downplay thoughts of economic and market disaster. We double down on our optimistic decisions. Our mind banishes such thoughts and we ignore obvious signals such as the true valuation of stocks based on real earnings.
It’s human nature. Most times, investors get caught holding a plunging stock but their overall portfolio value isn’t hurt much. But in certain times, a clear signal of a major correction or market bottoming appear, is much like the bottom you see when you’re passing the peak on a theme park roller coaster track.
While a park roller coaster thrill seeker gets to enjoy this experience of freefalling with gravity, investors don’t like a stock market crash much. Such losses can be devastating.
It’s not if the stock market bubble will burst, only when it will burst
Smart Investors with Hedging and Crash Strategies
Smart stock market investors open their minds to stats, trends, opinions, and stock market crash timelines and they sell early to ensure they don’t lose their shirts.
What is the general advice for self-directed investing enthusiasts? Remember that you’re not an expert. Even the experts aren’t experts so don’t feel any guilt or embarrassment. When the stock market gurus warn you, it’s too late. All they can do is tell you is that you’re on the doomed trip to the bottom.
Review the factors that indicate an future stock market crash.
Hedging is a risk management strategy employed to offset losses in investments by taking an opposite position in a related asset — excerpt from Investopedia
A Hedging Strategy
Hedging is a term that describes the purchase of a stock derivative to cover risky purchases. And right, nearly all stocks are risky investments. You see hedging in the currency markets as businesses their purchases at a certain date, so that if a currency plunges, they don’t take a bath.
Yet, there are smart people, such as conservative investors, hedging strategists, and those who pick winners that will be able to ride out the storm. For instance, those who picked Amazon, Google, Facebook, Walmart, and Costco when the Covid 19 crash hit, did extremely well. Those who recognized the duration of the pandemic and picked the right pandemic stocks won.
If you pick the best post pandemic stocks, you might do well in the next two years. Beyond that is a period of strong uncertainty as the US and most countries battle their fiscal demons. Then it’s likely a whole new set of post, post pandemic stocks. Is Amazon one of them?
How to Invest Before a Stock Market Crash
1. Buying In-The-Money (ITM) Puts
Buying puts (if you can acquire them) can certainly help. If you insure any possible losses from the crash, it’s a miracle. Of course, puts will come at a cost. This strategy can get very sophisticated in a general way or specifically with the securities you’re holding.
Perhaps the most basic way of hedging against a stock market crash is to buy in-the-money (ITM) puts on equities index futures. Buying a put gives the holder the right, but not the obligation, to sell a futures contract at a specific price on some forthcoming date in time. If you’re interested in how to hedge with options against a market crash, it’s worthwhile to learn all about buying ITM puts.
2. Invest in FAANG Stocks
You could park your money in Google stock, Facebook Stock, or Amazon stock and fare reasonably well. Google alphabet, Walmart, Costco, and other recession resistant stocks are a good choice. Apple is risky given consumers will avoid luxury stocks. Tesla always bucks the trends, but competitors are impinging on their space. And a recession would bring back fossil fuels in a big way.
3. Short the S&P
You could short sell stocks on the S&P. During a crash, even Gamestop and other Reddit powered stocks would crash. Gamestop is apparently planning to sell new stock so it would be the ultimate short sale, given its artificial support.
4. Short the Russell 3000
A crash is most likely to hit small caps and small business the hardest. If a panic hits, investors will jettison their Russell stocks just like they’re embracing them now.
5. Buy Long Term Treasuries
During a crash or recession, treasuries will enjoy a boom. Traditionally, treasury bills and bonds are the go to investment in a recession. Unfortunately, we may be headed into an inflationary period which means low rate treasuries and bonds might be a bad investment. Some suggest buying Treasury Inflation-Protected Securities instead.
6. Buy Rental Property
A stock market crash often implicates a housing market crash, and vice versa. Stock sell-offs are massive events like a landslide and everything in the way gets annihilated. Rental property provides ongoing revenue, tax breaks, and in recessions, rental demand rockets as foreclosures rise. You may not get rich given rocketing housing market prices, but it is considered a safer avenue.
7. Buy VIX Calls
The VIX is an index of market volatility. When stock prices are volatile, it signals investors flagging confidence, which sometimes happens before a full blow flash crash.
8. Sell Stocks and Buy Cash
Some currencies such as the USD are the gold standard and offer significant protection in a stock market crash. The US dollar is down of late, but it’s uncertain which direction it will go. There are however, other country currencies that are recession proof. JPMorgan Chase believes the Swiss franc, Singapore dollar, U.S. dollar, and Japanese yen are the best recession proof currencies. If investors flee stocks, they’re likely to stick with cash and it could drive the US dollar upward.
9. Buy Gold
Gold is the standard and when stocks, bonds and other securities don’t look good, gold is perhaps the only thing left. Check out gold stocks as they can perform much better than the price of gold itself. ETFs (Exchange Traded Funds) are groups of stocks in a particular sector and Gold etfs can be high performing during recessions (normally).
10. Short Specific Sectors
Those investors who shorted airline stocks, cruise stocks, entertainment stocks, restaurant stocks, financials and industrials, made a fortune. Recessions hits some sectors hard and you don’t want to be an investor in them. Biotech is an example of a sector that’s difficult to monetize during recessions (unless it’s a Covid 19 vaccine). Long shot research gets hit by a kill button. Consumer discretionaries such as electronics might be good candidates since during recessions, tariffs jump up.
11. Sell Your Portfolio and Buy Key IT Stocks
Recession or stock market crash won’t stop the rise of IT. In fact IT is efficient and has better national and international business potential. Information technology stocks performed incredibly well during the pandemic.
12. Sell and Short High P/E Ratio Stocks
If a stock has low earnings and a high price, it is the most likely stock to crash. You likely should be selling such stocks now, given volatility and government problems. When some Demon’s vote against the current US President’s stimulus targets, or block the big corporate tax hike, that will rock the stock market.
13. Invest in Hedge Funds
Hedge funds are an investment firm that uses complex strategies including short-selling, leverage, derivatives, and alternative asset classes to generate loss resistant results for investors. As the name suggests, these funds have a no lose strategy behind them. However, the government regulates who can can invest in hedge funds, such as those with more than $100,000. This gives the wealthy an advantage and precludes most self-directed investors.
Recently investors, hypnotized by media propaganda, believe Cathie Woods in a stock market oracle. They’re copying whatever she buys for the Ark Invest Hedge Fund. That portfolio has enjoyed big success because of Tesla, but TSLA stock price could dive at any time. It is not a safe, recession proof stock despite how popular it is.
During the last recession, the hedge funds had to bailed out by the government. So in this case, the government with its printing presses was the hedge. Stimulus is flowing but don’t count on the government anymore.
14. Invest Long Term
Take a close look at technology trends, consumer demands, and companies positioned to provide solutions needed ten years from now. They are low growth, low profit, yet what they make and sell has buyers in the future. Of course, you can only predict which companies will still be around in ten years and are profitable. That’s why it’s good to visit my blog again and again on a regular basis so you really get into the forecast mindset.
Successful hedging and long term investing strategy success is in the details too. But you can discuss this with your investment advisor. If you’re a self-directed investor, it’s important to have someone review your investment strategy and get some stock investment advice. It’s an important way to learn and have some of your theories reviewed.
If your investment strategy is valid you should have no qualms about asking for opinions. Opinions are just angles on your asset positions. Those opinions give you a richer view.
Most market pundits see the odds of an extended market crash as remote, but a complicated economic and political situation raises risks, which you see reflected in elevated VIX index. There’s no doubt that many investors are already adjusting their holdings to hedge against losses. These are the most intelligent investors.
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