- Posted September 21, 2015 by
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Wealth Managers Now Recommending Advanced Strategies to Minimize Investment Losses
According to Tyson Kunst at Verus Capital Advisors in Roseville, California, a firm that specializes in creating strategies that protect investments and combat sudden market drops, “Things have changed dramatically for investors in the past 15 years. Today’s twenty-first century stock market is not only global, but it’s so interconnected that financial problems in China or Greece can affect American markets tremendously. We’ve all seen this happen now and everyone’s aware, so it only makes sense to include downside protection in your retirement portfolio.”
He is, of course, referring to China’s stock market crash now being referred to as Black Monday, which occurred on Monday, August 24, 2015. This event sent global stock markets reeling. The U.S. markets lost $2.1 Trillion in just six days, experiencing the worst drop since October 2008. Though some stabilization has since occurred, investors around the world are still nervous.
Unfortunately, the world is learning the hard way that what happens in some foreign country far away can have a profound effect on an individual’s portfolio. As the earth grows smaller, its inhabitants are realizing just how interdependent the world’s financial eco-systems are. What many investors want to know now is how to protect themselves from losses such as everyone has recently seen.
Many of today’s wealth managers specialize in developing unique strategies for clients that are designed to minimize losses. This is a growing trend that financial planners are encouraging clients to consider. This not only gives investors peace of mind, but it protects their money from the fluctuations the market has experienced over the past 15 years. While diversification can reduce market risk, it falls short in many cases.
The most common strategies used by money managers are portfolio insurance, inverse funds, market stops, and increasing the investor’s cash position. With portfolio insurance (also known as a Put Option), the stock price is protected against market risk by allowing you to sell shares at a predetermined (strike) price. If the stock falls below the strike price, you can sell the put for a profit, or exercise the option and sell the shares at the higher price. This is highly recommended during times when the market is volatile. With inverse funds, an investor can actually profit when the market goes down. Inverse mutual funds or Exchange-traded funds (ETF’s) are created by using several derivatives that result in profiting from declines in underlying benchmark values.
A third method is known as a market stop. This creates a virtual trigger that sells off shares once the market share reaches a certain price. Of course, increasing cash position is the most common method used by investors due to its simplicity. This is a common-sense concept that simply says, the more cash an investor has outside the market, the less they can lose. Any one of these or a combination of them can be created to protect a portfolio and most experienced wealth managers will recommend a personalized plan of protective techniques in accordance with each individual’s portfolio.
He concludes by saying, “With the continuing uncertainty surrounding the world’s stock markets, it only makes sense to build-in some type of protection or insurance against losses. This minimizes an investor’s losses and gives them peace of mind regardless of what’s going on in the financial world. These days, it’s all about downside protection.”