Market volatility driven by trade wars, political uncertainty, and economic shifts can be nerve-wracking for investors. However, pulling out of the market entirely can mean missing out on potential rebounds. Instead, savvy investors can use strategic moves to manage risk in their portfolios while staying invested. Here are four potential ways to safeguard gains without stepping to the sidelines:
Diversify Across Asset Classes
When markets get turbulent, diversification remains a fundamental risk management tool. By spreading investments across different asset classes—such as stocks, bonds, commodities, and real estate—investors can reduce the impact of any single market downturn. In times of uncertainty, sectors like consumer staples, healthcare, and utilities often provide stability, as they tend to be less affected by economic cycles.
Utilize Stop-Loss and Trailing Stop Orders
Automated stop-loss and trailing stop orders can help investors limit downside risk without constantly monitoring the market. A stop-loss order sells an asset when it reaches a predetermined price, preventing further losses. A trailing stop order adjusts dynamically as stock prices rise, locking in gains while still providing downside protection. If someone wants to limit losses but also wants to make sure they don't miss out on recovery, they may also consider a buy-stop or buy-limit order. It's important to consider trade costs and tax implications when trading using these types of orders which like all investing include risk and no guarantee of getting the desired outcome.
Increase Allocation to Defensive Stocks and Dividend Payers
Certain stocks—often called "defensive stocks"—tend to perform well even in turbulent markets. Companies in industries such as utilities, healthcare, and consumer staples usually maintain steady demand regardless of economic conditions. Additionally, dividend-paying stocks provide consistent income, helping cushion overall portfolio returns when market growth slows.
Hedge with Options and Alternative Investments
For those comfortable with more sophisticated strategies, hedging with options can be an effective way to manage risk. Protective puts, for example, can act as insurance by allowing investors to sell shares at a set price, limiting potential losses. Alternative investments like gold, commodities, real estate, private investments, and even hedge funds can also serve as portfolio stabilizers during uncertain times.
Understand Losses vs. Opportunities
Although no one likes to see a statement with a lower balance than the previous month, it's important to understand that stock markets are volatile in nature. Even if you don't know what the coming weeks or months may bring, stock market investors should be confident about long-term opportunities during periods of uncertainty. If an investor is comfortable buying stocks before a market downturn, it may be wise to look at this as a buying opportunity. Your account being down today isn't a realized loss unless you sell while the value is low. This is generally only a good strategy for investors with a long time horizon. Remember the fundamental goal of investing is to buy low and sell high. So, if markets are low...
Final Thoughts
Market uncertainty is inevitable, but panic selling isn't the answer. By using smart strategies like diversification, stop-loss orders, defensive stock selections, and hedging, investors can stay in the market while managing risk effectively. The key is preparation—building a resilient portfolio that can weather market storms without derailing long-term financial goals.
Next Steps
If you're unsure about what to do next and want to talk with someone, set up an initial consultation with us. We can discuss everything from providing confidence that your strategy is sound to managing your portfolio for you using strategies like those listed above.
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The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra Investment Services, LLC or Kestra Advisory Services, LLC. This is for general information only and is not intended to provide specific investment advice or recommendations for any individual. It is suggested that you consult your financial professional, attorney, or tax advisor with regard to your individual situation.
Options involve risk and are not suitable for all investors. Before trading options, you should carefully review the 'Characteristics and Risks of Standardized Options' provided by the Options Clearing Corporation (OCC). Trading options can result in substantial or total loss of principal investment. Certain complex options strategies carry additional risks, including illiquidity and margin exposure. For more details, consult your financial professional and read the OCC’s disclosure document at www.theocc.com.
Please note that there are special risks investing in alternative investments such as lack of liquidity and potential adverse economic and regulatory changes. For this reason, there are minimal suitability standards that must be met.
A diversified portfolio does not assure a gain or prevent a loss in a declining market. There is no guarantee that any investment strategy will be successful or will achieve its stated investment objective.