4 Ways You Can Prepare for a Falling Stock Market

You can take several steps to prepare for a declining stock market.

Bruce Kamich, a technical analyst evaluating markets for 50 years, believes the stock market will decline next month.

"Since Kamich has made two money-making forecasts in a row, listening to what he says now could be wise," writes Todd Campbell.^[1]

Here is Kamich's advice for investors:^[2]

"Traders and investors should take appropriation action. Sell calls, sell stock, buy puts, etc. This is not a drill. We may have a window of time until the middle of September, just five weeks away, to get set up for the next decline," concludes Kamich.

Kamich mentions a strategy known as "hedging," but there are other steps you can take if you believe the stock market will decline.

(1) Hedge: Hedging is a strategy for protecting your investments during a market decline. Hedging involves using financial instruments to offset potential losses in your portfolio. For example, you might buy put options on stocks or buy gold.

Buying a put option can be considered a form of hedging. A put option gives the holder the right, but not the obligation, to sell an asset at a predetermined price (the strike price) within a certain time frame. If the price of the underlying asset falls below the strike price, the holder of the put option can exercise their right to sell the asset at the higher strike price, effectively hedging against the potential loss. However, it is important to note that buying a put option does come with costs, such as the premium paid for the option contract. Additionally, it may not always be a perfect hedge, as the price of the underlying asset may not fall as expected.

When the stock market experiences a downturn, investors may turn to gold as a safe haven investment, which can drive up the price of gold. But the relationship between the price of gold and the stock market can be complex and multifaceted because it depends on several factors, including economic conditions, market trends, and investor sentiment.

(2) Diversify: One of the best ways to protect your portfolio during a market downturn is to diversify your investments. This means spreading your money across different asset classes, such as stocks, bonds, and cash. By diversifying, you can reduce your exposure to any single asset class and help protect your portfolio from market volatility.

(3) Invest in Defensive Stocks: Consider investing in defensive stocks. Some companies tend to perform well even during economic downturns, such as healthcare, consumer staples, and utilities. These types of stocks may generate lower returns than growth stocks, but they can help protect your portfolio during uncertain times.

(4) Use Stop-Loss Orders: Another option is to use stop-loss orders. These allow you to set a specific price at which your stock will be sold if it drops below a certain level. Stop-loss orders can help limit your losses and protect your investments.

Big Point: The stock market can be unpredictable, but there are things you can do to help protect your investments and reduce losses.