How to Protect Yourself From a Summer Stock Market Correction or Crash

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It is now June, and the echoes of “sell in May and go away” are still ringing. In fact, the Dow Jones Industrial Average went negative for the year on June 8. With the bull market now more than six years old, and with equity valuations being high, at least some of the cautious investors are starting to worry that the market could be ready for a big tumble.

24/7 Wall St. is bringing up some of its ways to help investors protect their assets in a sell-off, a market correction or a short-term crash. Just keep in mind that investors have bought every single pullback for what is nearing four years now. Still, now investors have to fear the soon-to-be Federal Reserve interest rate hike cycle and a return to normalization in rates and in Fed monetary policy.

24/7 Wall St. has routinely visited how investors can crash-proof their portfolio. There is at least some good news here — you can crash-proof your portfolio.

Before you panic, remember that stocks have not pulled back more than 10% in over three years. Also, most investors do not even agree on how to define a crash or what level really brings a point of real worry. Is it 300 points in a day? A 5% correction, a 10% correction or a 20% sell-off?

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Each one of these methods for protect your portfolio has been covered in more detail, but here are some of the quick-hit basic strategies that investors can use to crash-proof their portfolios or just brace for the next market correction:

  1. Take profits! By now, most long-term portfolios have some substantial profits. You can take some money off the table and keep some in the market. Nobody ever went broke taking profits.
  2. Protect gains or bet on certain drops with put options. Buying put options on companies or sectors is how you do it.
  3. Get some income from your stocks by writing call options. This will bring in an added premium/income on top of your gains and the dividends.
  4. Then there is the costless collar strategy. This sounds complicated, but you effectively sell calls and use the premium to buy put options.
  5. There are always inverse exchange traded funds (ETFs) and short selling ETF strategies. Just don’t forget about nor ignore tracking error.
  6. If you are aggressive, consider short selling some of the companies or sectors you think have become fully valued or overvalued.
  7. Defensive stocks with high dividends have performed well in most pullbacks. The dividend stocks have been under pressure ahead of rate hikes, but many stocks still yield more than the 30-year Treasury bond.
  8. Go for companies with huge stock buyback plans. Maybe you don’t want to buy more shares and maybe the public wants to be timid, but many companies are buying back huge numbers of shares each week and month directly in the market. There are even have buyback ETFs.
  9. Use limit orders, which will keep buyers from overpaying. For sellers, you can always set a higher sale price and if it gets hit then you were happy to lock in that upside at a predetermined rate. Investors can also use limits to stay in as long as the price does not drop under a certain level.
  10. Take your hands off the wheel and go to a very conservative financial planner who has steered clients through bull and bear markets before.
  11. You will never get rich doing this, but you can always just decide to hide out in short-term or intermediate-term Treasury notes.

Here are the full details on 11 strategies to protect yourself from a stock market crash — even while you still get to stay in the markets.

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