Investing involves risk, especially when investing in equities and ETFs. Stock market crashes are a natural part of this market, so it is worth being prepared for this eventuality. If we expect falls, we should first determine our investment horizon and understand the value of the assets we hold. If our horizon is less than 12 months or we are unsure about the future of our investments, it is worth considering several scenarios.
Table of contents:
- Two basic principles of investment
- How to hedge your investment portfolio against risk?
- What to avoid during a crisis?
Two basic principles of investment
One solution that may come to mind is to sell the investment. However, this should be a last resort, in the words of Warren Buffett: ‘The first rule of investing is don't lose money, and the second rule is don't forget rule number one’. If you do decide to sell, it is worth moving the funds into safer assets, such as government bonds or deposits, to keep them working.
How to hedge your investment portfolio against risk?
We do not have to sell our shares or funds to hedge against falls. We can use portfolio hedging by using contracts for difference (CFDs) on shares, ETFs or other instruments available from brokers. In this way, we can temporarily hedge the value of the portfolio against market movements.
Futures contracts, which were originally used for hedging, are now also used for speculation, offering short-term investments with lower transaction costs and leverage. Hedge funds use them for arbitrage, earning money from differences in valuations, which increases liquidity and market efficiency, although it requires sophisticated systems and large amounts of capital.
More sophisticated investors can use options, which give the right (rather than the obligation) to sell at a certain price. However, this requires a fee called a premium and more knowledge, but allows you to hedge against dips while leaving you with the opportunity to profit on rises.
What to avoid during a crisis?
Perhaps the worst decision is to sell an investment simply because it has fallen in value. It is worth remembering the difference between investing and speculation. We invest in assets whose intrinsic value is higher than the market. Speculation, on the other hand, is based on anticipating short-term price movements, driven by massive market behaviour.
Grzegorz Dróżdż, CAI MPW, Market Analyst of Conotoxia Ltd. (Conotoxia investment service)
The above trade publication does not constitute an investment recommendation or information recommending or suggesting an investment strategy within the meaning of Regulation (EU) No. 596/2014 of April 16, 2014. It has been prepared for informational purposes and should not form the basis for investment decisions. Neither the author of the publication nor Conotoxia Ltd. shall be liable for investment decisions made on the basis of the information contained herein. Copying or reproducing this publication without written permission from Conotoxia Ltd. is prohibited. Past performance is not a reliable indicator of future results.
CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 79,03% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
Trade this news from Conotoxia Ltd. platforms
Go to your account
