Protection Strategies For The Bear Market. Let’s first start a common question; ‘What is a bear market?’ Of course, it has not to do with the bear at all. Investors who have a pessimistic view of the market are called bears. In a bear market, bearish sentiment has set in, and the downward momentum is only fueling the prevailing market pessimism.
With the strong correlations between traditional asset classes (stocks, bonds and cash) and intensifying geopolitical and economic risks, managing market turbulence and protecting your portfolio against downside threats requires innovation and careful timing. Using a volatility threshold can be useful in limiting losses in bear markets.
One of the first advice given to many investors has always been: “Don’t put all your eggs in one basket”. In other words, diversify your portfolios between several asset classes so that in the event of the poor performance of one the type of asset, you always have all the others to allow your portfolio to reach the desired level when you need it.
For some investors, one of the grim reality is diversification has not paid off in the past ten years; in fact, it even penalized the returns on the portfolios. Conversely, the winning strategy has been to concentrate its positions in developed markets, general stock indices or listed index funds. And now, unfortunately, that volatility is back, diversifying your portfolio is more challenging than ever. Placing our eggs in different baskets does not work if all the baskets are glued together.
TIMING IS VERY IMPORTANT
Choosing the timing of the investment strategy to take effect when necessary provides us with the most effective protection. However, the timing (timing selection) is crucial. A much more effective way to apply this put option strategy is to use the volatility index (VIX) | VIX stands for the Volatility Index, a 30-day market volatility index calculated by the Chicago Board Options Exchange (CBOE). | to better alert to market turbulence. It could act as a trigger so that when volatility reaches a predetermined level, our put strategy can kick in and provide the required protection.
Protection Strategies For The Bear Market