How To Protect Your Portfolio From A Market Crash

Before I get started, please understand this is not a recommendation. I make NO recommendation on my channel. And frankly other than being an advocate for index funds, I will NEVER make any investment recommendations.

Why? Because I don’t know your situation. And, I have no clue if what I think is “good” will be appropriate for you. Only YOU can know that.

So, do NOT invest in this base don this video. No this is not reverse psychology. I don’t get paid to get you to invest. I don’t get a referral fee. Anything like that. I am truly saying if you pursue and investment like this it’s because of YOUR research.

Now, what I want to show you in this video is actually how REAL downside protection strategies work. Simple asset allocation between stocks, bonds and cash, do not work the way I think many believe they do.

There is NO proof that when stocks go down, bonds go up. On occasion? Sure. Bank your life’s work on that? No thank you!

So, if downside risk protection is what interests you, you really have only a few strategies.

1. Stay out of the market
2. Buy CD’s and government bonds
3. ACTIVELY, and I mean ACTIVELY Hedge your portfolio with options.

This is what I show you happened during the 2000-2002 crash and again in 2008.

A literal hedged portfolio survived just fine. Why? Because of the money the manager bet to provide a positive return when everything else went south.

Worked like a charm. IN THAT CIRCUMSTANCE!

When does it not work? When the markets go up and continue to do so. When this happens, the portfolio manager loses the money he bet on the downside happening. And those losses are a headwind that can’t be overcome.

In this case, the manager got 40% of the upside when the markets went up. BUT, and this is key, he only got 22% of the downside when the markets went down.

Thus, underperform on the way up. Outperform on the way down. The way a true hedge strategy should work.

Will it always work? I do not know. Maybe, maybe not.

But what we do know is that in 2008 the old downside risk protection strategies of having low-correlated assets didn’t work at all. As when turmoil happened, EVERYTHING had a high correlation…everything except government bonds that is.


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