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For investors, portfolio insurance against the decline of the market

Whenever the stock market has a bad hand, as in the third quarter, almost all stock investors hope to have something like an ace in the hole.

Investment professionals call this “portfolio insurance” of the privileged card strategy, a way to cover the brutal loss of a large-scale market decline. In recent years, more specialized investments to slow down market flows have become available for individual investors.

Although portfolio hedging strategies are complicated and do not work perfectly, they can be widely used to protect wealth over time. But shielding against future income loss and facing short-term volatility are often two different missions that have different costs and results.

What most investors invade is volatility, daily sales that can bet up to 3 percent of stock prices; This happened more than once in August. To safeguard those races of Tilt-A-Whirl, people can turn to the investment that rewards them in the most unbridled times. This approach would be paid in August when the 500 & Standard & Poor stock index lost 6 percent, and in September, when it lost nearly 3 percent.

Nine exchanged exchanges, known as E.T.F.s, are linked to indexes that pose the volatility of the shares. The idea behind these funds is that when short-term fears derail shareholder returns, investors can still make money. The funds follow a “fear” index listed by the Chicago Board Options Exchange that earns when the stock goes south.

The biggest fear of E.T.F. By business is the VIX Short Term Futures E.T.F. (Vixy). The fund grew 27 percent for the third quarter, a good return considering the S & P 500 was dropping by 6 percent at that time.

As investors became smarter during market losses, volatility trading products went up. In August, C.B.O.E. He reported that the negotiation of these funds was the “second most busier of all time”, eclipsed only by the collapse of 2008.

But when the market flattens or earns seats, fear-raising returns are abysmal. The ProShares fund declined by 49 percent in the last three years of October 19. As with all short-term trading funds, investors need to be quite accurate when they come in and out of ETF, which is not something that many individuals can do with a consistent success.

Another strategy that has grown in popularity among individual investors in recent years is the low volatility or the smart beta stock approach. These funds select actions that do not have as many negative movements as the rest of the market, can offer growth and are often less prone to huge declines because they pay constant dividends.

“I like the idea of ​​stock growth and lower portfolio risk,” said Howard Erman, financial planner certified at Seal Beach, California. “The idea is to manage volatility and not to avoid it, which means investing in stocks and trusting in the growth of the global economy.” Every bear market ends, and when it does, you have to be invested in shares. ”

While low volatility funds can and lose money in a recession, their losses are not as large as those of S. & P. ​​500. Steve Stanganelli, a financial clearing certified with Clear View Wealth Advisors in Amesbury, Mass., Ha IShares MSCI USA Minimum Volatility ETF recommended (USMV), which holds holders of durable dividends such as AT & T Inc. (T) and Procter & Gamble (PG). The fund dropped slightly more than 1 per cent in the third quarter, compared to over 6 per cent for S. & P. ​​500.

A more active approach to portfolio protection can be found through hedgelike or alternative mutual funds, which can break through a wallet to make money on disadvantage if market conditions warrant. It is also possible to invest in commodity funds and real estate funds that tend not to move in stock with US stocks for most of the time (except for 2008).

Managers of these funds are free to access securities that could do well during a recession or “short” companies, namely to make money when companies decline in value.

Returns for funds to more than 100 long-term funds on the market, however, vary considerably and are expensive to own. The Turner Medical Sciences Long / Short Fund (TMSFX), for example, increased by 20% this year, until October 19th. It mainly holds small stocks of health care.

Pay attention to any active strategy, because managers may still guess bad or whole industries may fall into the lead. Then you will pay for their mistakes and you will not have the protection against the bark you are looking for.

For even more sophisticated investors, options – betting that a security or index will go or fall over a given period – can offer some protection down.

You can, for example, buy “put” options on a single stock or an entire index that you pay if a security declines in a given time. For this strategy to make sense, you need to have some understanding of how the options work; Fees and fees are involved. It may be helpful to work with a specialist in options.

For most investors, however, a complete portfolio review involving a combination of strategies can smooth some of the bumps. Most, if not all, certified financial planners, financial analysts, and registered investment advisors can model the portfolio that will allow you to sleep at night.

You can, of course, create your own wallet or go online to create one through a consultant like Betterment, Wealthfront or Personal Capital. But if you have specific needs such as university savings, late retirement, or tax reduction, a personal consultant can do some of your hand and maybe better customize an investment plan for your risk and return goals.

Mr. Stanganelli, for example, uses a wide range of low volatility funds, option-based funds, and dividing into customer portfolios, tailored to their objectives and risk tolerance.

“The market will be volatile and things will change,” he said. “But as long as you have a plan, you do not have to panic until you reach your goals.”

If you choose to work with a consultant, ask that all recommended portfolios are “stress-tested” so that you can see how much money you will lose at a 10%, 20% or 2008 maturity. So you can determine which hedging strategy is He feels right for you.

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