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Trader Q&A: Can You Share Some Strategies on How to Protect My Portfolio When Expecting a Correction?

Schwab’s Trading Services team discuss things to consider when mitigating risk against known events.

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Lou Mercer: All right. Next question. Kenny from Louisiana, can you share some strategies on how to protect my portfolio when expecting a correction?

Lee Bohl: Bit of a challenge to expect a correction, I think. I think that might be the thing that I want to talk on real quickly, is just the idea that we're anticipating a market sell-off. I struggle with this concept only because it is costly to be against your long term portfolio. You know, if you're doing this one a month to month basis, you're going to – basically, you're hoping that your insurance expires worthless.

And that can work out for you in certain circumstances, but I think it's a far better approach to consider what we would refer to as known events, right? Earnings windows, big news, things that can drive the market one direction or the other, typically to the downside. When you have those known events, those are things you can prepare for. If you're just constantly of the belief that the market is due for a sell-off, and you're paying for protection, you've going to be paying a lot more than you probably need to.

Lou Mercer: Yeah, generally, you need to – it's going to cost about ten percent of your portfolio for ten percent protection. So let's say you have a $100,000.00 portfolio. It's going to cost you $10,000.00 to protect yourself on anything more than a 10 percent move.

So imagine that. If the market drops from – your $100,000.00 portfolio drops down to $90,000.00, a 10 percent correction, well, you already spent $10,000.00 for the insurance, and now you don't even get to use the deductible, so you're really out.

Kevin Horner: So I think, yeah, in your car example, maybe you should have had Hobo as the guard dog.

Lou Mercer:   Rest in peace, Hobo.

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