5 Strategies To Preserve Your Capital

Key takeaways

• Market volatility is normal—especially during periods of potential recession, international war and high inflation
• The best ways to protect your capital include diversifying your holdings, choosing non-correlated assets and taking the long view
• Investing in dividends can buffer your overall returns and minimize losses
• Conversely, acting on impulse, selling based on short-term volatility and trying to time the market can all generate permanent losses

The major stock indices all closed lower on Friday, continuing multi-week losing streaks for the Dow, S&P 500 and Nasdaq Composite. And if Monday’s mass sell-off is any indication, Wall Street is in for more turbulent times ahead.

That’s the message portrayed in Goldman Sachs’ latest forecast, which predicts a 35% chance of recession in the next 24 months. Deutsche Bank agrees, having reported in April, “We think a hard landing will ultimately be unavoidable.”

Threats of a financial crisis, international war, global recession and trade imbalances are difficult enough to stomach one at a time. Asking investors to grapple with all of them simultaneously… Well, it’s no wonder the market is so volatile.

In such topsy-turvy times, it’s common to hear investors talk about moving money to greener pastures or selling out. But instead of making rash decisions, relying on a solid portfolio protection strategy is a better way to safeguard your assets.

Here are five ways to protect your portfolio—and four moves to avoid altogether.

5 ways to protect your portfolio

1. Consider a portfolio rebalance

Portfolio rebalancing helps you identify any changes in your risk tolerance, strategy and underlying holdings. Experts generally recommend revisiting your asset allocation at least once a year to determine which holdings need a good trim.

But when market volatility suddenly shifts your allocation for you, it can pay to diverge from your usual schedule. Take some time to review (and potentially sell) overweighted holdings and consider where you should pump up underweight positions.

2. Check your diversification

Modern portfolio theory (MPT) holds that a well-diversified portfolio is the key to catching gains and circumventing the worst losses. Strategic diversification strategies can reduce risks specific to individual investments by splitting capital amongst different:

• Asset classes such as stocks, bonds, real estate and commodities
• Sectors or industries like healthcare, tech or agriculture
• Market capitalizations, including small-, mid- and large-cap stocks
• Countries, such as developed or emerging markets

3. Invest in non-correlating assets

Unsystematic risks are risks posed by individual investments. By contrast, systematic risks are associated with investing in the market, period. While systematic risk is always present, you can reduce it by investing in non-correlated assets.

Non-correlated assets react differently – even inversely – to market changes compared to stocks. For instance, if an event causes stocks to go down, bonds may go up, or vice versa. Ensuring you have holdings that are not all in the same category can smooth out your portfolio’s overall returns.

4. Buy into dividends

Investing in dividend-paying stocks can help protect your portfolio and boost your lifelong returns. When stock prices fall, dividends provide a small cushion that can lower volatility and keep risk-averse investors in the market. They also offer additional funds to reinvest in a market downturn.

5. Take the long view

Market volatility is just part of being invested. And, on a long enough time horizon, it’s normal and expected to see multiple periods of decline and gain.

For long-term investors, one way to deal with volatility is to ignore it altogether. Staying invested and continuing to buy shares according to your normal schedule or dollar-cost averaging strategy often produces the best long-term returns. (Assuming you’re holding a well-balanced, properly diversified portfolio.)

Plus, downturns provide a chance to buy quality stocks at a discount, meaning you might enjoy greater gains when they recover.

That said, if you’re stuck with average-at-best stocks that repeatedly hit new record lows, it can be wise to trade the losers for stronger positions. The key is seeking out firms with robust balance sheets, consistent earnings and long-term potential.

4 moves to avoid in volatile markets

Warren Buffett has two rules in investing:

1. Never lose money
2. Don’t forget Rule #1

Of course, that doesn’t mean you won’t see short-term losses – just that you have to know when to sell out or carry on. But because it’s easy to get emotional when the market messes with your money, it’s wise to have a few other rules in place, too.

To start you off, consider that it’s unwise to:

1. Don’t act on impulse

The market is full of risks, and short-term volatility is just part of playing the game. But if you make sudden moves without thinking, it’s easy to miss gains or lock in losses. Instead, resolve only to make decisions when your head is clear.

2. Don’t let your emotions run your portfolio

This goes hand-in-hand with Rule #1. If you sell in a panic or out of fear of future downturns, your emotions effectively run your strategy. The same is true in the reverse: when the market is up, it’s easy to get cocky and make risky moves that lead to losses.

Fortunately, you can get ahead of your emotions by aligning your investment decisions with your strategy and risk tolerance. For instance, you might:

• Decide ahead where you’ll move your capital when the market or economy moves in this or that direction
• Weather the storm by not logging into your brokerage account
• Invest in risk-adjusted funds that do the heavy lifting for you

3. Don’t sell based solely on short-term market movements

Selling stocks when the market drops often makes temporary losses permanent. While you shouldn’t hold every position blindly, consider each investment’s underlying fundamentals and future prospects before shedding temporary losses.

4. Don’t try to time the market

We get it: it’s difficult to keep calm during volatile markets. That’s especially true when 24-hour news cycles scream about impending war, oil and gas prices, inflation and the Federal Reserve.

Unfortunately, predicting when and which stocks will rise or fall based on the news cycle is generally impossible. While it’s easy to find clarity in hindsight, making sense of the news when you’re in the thick of it generally leads to losses.

Remember: market downturns are often followed by above-average rebounds – but only those who remain invested will profit from the aftermath.

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