Download the Schwab app from iTunes®Get the AppClose

Trader Q&A: Can You Share Some Strategies on How to Protect My Portfolio When Expecting a Correction?

Schwab’s Trading Services team discuss things to consider when mitigating risk against known events.

Click to show the transcript

Lou Mercer: All right. Next question. Kenny from Louisiana, can you share some strategies on how to protect my portfolio when expecting a correction?

Lee Bohl: Bit of a challenge to expect a correction, I think. I think that might be the thing that I want to talk on real quickly, is just the idea that we're anticipating a market sell-off. I struggle with this concept only because it is costly to be against your long term portfolio. You know, if you're doing this one a month to month basis, you're going to – basically, you're hoping that your insurance expires worthless.

And that can work out for you in certain circumstances, but I think it's a far better approach to consider what we would refer to as known events, right? Earnings windows, big news, things that can drive the market one direction or the other, typically to the downside. When you have those known events, those are things you can prepare for. If you're just constantly of the belief that the market is due for a sell-off, and you're paying for protection, you've going to be paying a lot more than you probably need to.

Lou Mercer: Yeah, generally, you need to – it's going to cost about ten percent of your portfolio for ten percent protection. So let's say you have a $100,000.00 portfolio. It's going to cost you $10,000.00 to protect yourself on anything more than a 10 percent move.

So imagine that. If the market drops from – your $100,000.00 portfolio drops down to $90,000.00, a 10 percent correction, well, you already spent $10,000.00 for the insurance, and now you don't even get to use the deductible, so you're really out.

Kevin Horner: So I think, yeah, in your car example, maybe you should have had Hobo as the guard dog.

Lou Mercer:   Rest in peace, Hobo.

Schwab has tools to help you mentally prepare for trading

Learn more >

Talk trading with a Schwab specialist anytime.
 
Call 888-245-6864
M-F, 8:30am - 9:00pm EST

Get 500 Commission-Free Online Equity and Options Trades for Two Years

Learn More >

Schwab Trading ServicesTM includes access to StreetSmart® trading platforms, the Schwab Trading Community, and Schwab trading specialists (a Schwab brokerage account is required). There are no fees to use Schwab Trading Services. Other account fees, optional data fees, fund expenses, and brokerage commissions may apply. Schwab reserves the right to restrict or modify access at any time. Schwab brokerage account online applications that have the “Schwab Trading Services” box checked will automatically be enrolled. For questions, call 888-245-6864 to speak to a Schwab Trading Services representative.

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. All expressions of opinion are subject to change without notice in reaction to shifting market conditions.

Schwab does not recommend the use of technical analysis as a sole means of investment research.

(1017-7Z7A)

Thumbs up / down votes are submitted voluntarily by readers and are not meant to suggest the future performance or suitability of any account type, product or service for any particular reader and may not be representative of the experience of other readers. When displayed, thumbs up / down vote counts represent whether people found the content helpful or not helpful and are not intended as a testimonial. Any written feedback or comments collected on this page will not be published. Charles Schwab & Co., Inc. may in its sole discretion re-set the vote count to zero, remove votes appearing to be generated by robots or scripts, or remove the modules used to collect feedback and votes.