💑 🍱 👩‍🌾 How to protect your assets during stock market corrections? 🙏🏾 🧣 ⤵️

Image: Unsplash

Financial markets cannot grow continuously over time. The prices of stocks, bonds and other financial instruments periodically “roll back” - such waves of changes are called corrections. Corrections can be observed both for one instrument and for the market as a whole. Today we will talk about this phenomenon and how, at such moments, investors can protect their exchange assets.

What is a correction?

Correction (rollback) - a change in the price of stocks or currencies in the direction opposite to the trend.
As a rule, this phenomenon occurs due to the "overbought" or "oversold" of a certain security or currency. Among other reasons - the lack of willing to trade at such a price.

From another point of view, the correction arises due to the large number of stop orders that make the price movement in the direction of their execution profitable, after which the price returns to the main trend. In addition, the correction is defined as a 10% decrease in one of the major US stock indices (S&P 500 or Dow Jones Industrial Average).

If we talk about significant market corrections, then from 1980 to 2018. 36 corrections occurred in the american market. Of these, only 5 went into the "bear markets", that is, they declined for a long time. This brought a lot of disappointment to investors who were in long positions at those times. It turns out that about 86% of the reductions are the usual corrections, and the market is successfully recovering in the future. But in the remaining 14% of cases, the decline is more serious and longer.

In February 2020, the U.S. stock market began a correction again as investors sold off stocks in favor of safer assets due to news of the spread and potential impact of coronavirus.

A historical analysis of previous corrections suggests that in such situations, the market may fall by 13%. As a rule, after corrections it takes about four months for it to recover to its previous level.

But here is one “BUT." This only happens if the stock does not hit the bear market, dropping 20% of its maximum. If losses are stretched to 20%, then there are painful consequences ahead and more time to recover.

Ways to protect against the effects of corrections on the exchange

Naturally, stock market corrections can have negative consequences for investors. There is a risk of losing most of the invested assets. To protect investors, they use various financial instruments that they choose based on investment strategies, experience, goals.

Below we consider several ways to protect against corrections.

Model portfolio

A model portfolio consists of several securities, selected according to certain criteria (for example, bonds or shares of one sector of the economy). This is a convenient tool for those who want to invest, but are not ready to engage in trade on their own.

This financial instrument is necessary for the formation of assets, taking into account the medium and long term prospects for increasing stock prices of certain companies.
The portfolio is compiled for the investor by professional analysts who regularly monitor the entire situation in the stock market: from macroeconomic indicators, the geopolitical situation in the world to official reporting and rumors in the professional community of a particular company.

Individual Investment Account (IIA)

IIS is a securities account. Its main advantage is the possibility of receiving a tax deduction from the state, which allows you to pay a smaller amount of tax or to return the tax already paid. This is a convenient state program for investors of any level. It is also suitable for conservative investors as a worthy alternative to a bank deposit, since IIS can simply store money and at the same time invest, receiving up to 53% per annum .

ITIcapital analysts have developed strategies for different levels of risk and the size of potential profitability. With them, IIS can add about 25% or 33% per year to the account.
Within one calendar year, no more than 1 million rubles can be added to the account. You can receive a tax deduction of 13% of the amount in the account from no more than 400 thousand rubles a year.

Structural product

A structural product (or structural note) is a financial instrument that provides an opportunity to generate income by participating in the growth and fall of an asset (security, currency, commodity). Structural products can avoid market risks or limit them.

Product profitability depends on the degree of participation in the change in the value of the underlying asset (security, currency, product). The degree of participation reflects the “participation rate”. This ratio is indicated as a percentage and shows how many percent the investor has acquired the underlying asset.

Example. If the participation ratio is 70%, and the price of the underlying asset has changed by 10%, the investor will receive 7%. This is slightly less than when buying a basic asset, but this guarantees the preservation of capital in an unfavorable scenario for the movement of an asset.

A structural product is executed for one or more assets and for a certain period.
In some cases, the return on the product may be higher than the return on the underlying asset. It depends on the period of the structural product and the volatility of the asset.

Conclusion

Long-term success with stock investment is the preservation of capital. One of Warren Buffett’s main rules is never to lose money.

Therefore, to sell the entire portfolio as soon as the stock price begins to fall - this is often not the right strategy. It is necessary to carefully monitor the market and balance the assets. Investment risk cannot be completely excluded, but thanks to special financial instruments and investment strategies, its consequences can be significantly reduced.

, Telegram- ITI Capital