Everett Collection
Until recently, many investors got accustomed to the U.S. stock market only going up.
But that was not normal. Now that volatility has creeped into the market, investors are asking how to protect their portfolio. There are four good ways I know of to protect your portfolio.
Let us explore with the help of two charts.
Two charts
Please click here for a chart of S&P 500 ETF SPY, +0.28% The same analysis applies to the Dow Jones Industrial Average DJIA, +0.51% Nasdaq 100 ETF QQQ, +0.12% and small-cap ETF IWM, +0.58%
Please click here for a chart of Facebook FB, -1.64% The chart shows when The Arora Report gave a signal to take partial profits on Facebook, Google GOOG, -0.31% GOOGL, -0.59% and Twitter TWTR, -0.93% For the sake of transparency, this is exactly the same chart that was previously published.
Please observe the following from the charts:
• On Jan. 26, which has turned out to be the top of the market, up to 69% of The Arora Report portfolios were protected. The chart shows three components of that protection and the specific amounts.
• Protection is dynamic and changes.
• Before the latest swoon, up to 85% of The Arora Report portfolios were protected. The chart shows three components of that protection and the specific amounts.
• The chart shows that during the February correction, volume became heavy. This indicated capitulation and the potential of a bounce. A bounce is exactly what happened, as seen in the chart.
• During the recent market swoon, the volume has not been heavy. This indicates that there is no capitulation at this time.
• The chart shows that during the market correction in February, the market got oversold. Oversold markets tend to bounce, and this is exactly what happened.
• During the current swoon, the market is not oversold.
The foregoing indicates that there is significant need for protection at this time.
Read: This may be the best time for value over growth stocks in 17 years
Ask Arora: Nigam Arora answers your questions about investing in stocks, ETFs, bonds, gold and silver, oil and currencies. Have a question? Send it to Nigam Arora.
Insurance policy
Most people will not go without insurance on their home, car or life. However, most investors do not even think about insurance to protect their portfolio. It is high time for those who have not been protecting their portfolio to start doing so.
Cash/Treasury bills
The easiest component of protection is to hold an adequate amount of cash. The chart shows the cash held by The Arora Report.
Those with a little bit more sophistication may consider holding Treasury bills instead of cash for extra safety and earning some interest.
Hedges
The chart shows two categories of hedges being held by The Arora Report and the specific amounts held. Hedging is a complex subject and a detailed treatment is beyond the scope of this post. Investors can choose from inverse ETFs such as S&P 500 inverse ETF SH, -0.28% and Nasdaq 100 inverse ETF PSQ, -0.06% for short-term hedges, and there is a place for leveraged ETFs such as S&P 500 leveraged ETF SDS, -0.47% and Nasdaq 100 leveraged ETF QID, +0.00%
Another option for hedging: laddering put spreads and call spreads.
Take partial profits
Investors may want to consider booking partial profits in select situations. For example, as shown on the chart, The Arora Report sell signal saved investors about $20 a share on Facebook, about $7 a share on Twitter and over $100 a share on Google.
Diversification
Diversification provides a degree of protection. Many individual do not seem to understand that many stocks move together. They have become overly concentrated in stocks such as Apple AAPL, -0.58% Amazon AMZN, +0.15% Netflix NFLX, +1.24% and Nvidia NVDA, +2.24%
An example of good diversification is owning some gold ETF GLD, -0.68% or silver ETF SLV, -1.28%
Disclosure: Subscribers to The Arora Report may have positions in the securities mentioned in this article. Nigam Arora is an investor, engineer and nuclear physicist by background who has founded two Inc. 500 fastest-growing companies. He is the founder of The Arora Report, which publishes four newsletters. Nigam can be reached at Nigam@TheAroraReport.com.