Capital Preservation is a conservative investment strategy where the primary goal is to preserve capital and prevent loss in your portfolio. Retirees and those approaching their final working years typically rank safe investing over capital growth investments.
There are three core principals we follow when managing a retirement portfolio. All of them require you to be proactive when it comes to applying risk management techniques that protect your portfolio from market volatility that we are currently experiencing in the stock market.
The principal I want to focus on today is Capital Preservation. What is the best method to help protect our nest egg in these uncertain times?
Learn to Trade Options
You may have watched my Special Presentation, “Secret #5: Learn to Trade Options,” it was based on The Seven Secrets to Making Money with VectorVest talk given by Dr. Bart DiLiddo, our founder. It’s one of my favorite presentations, very powerful and educational.
Secret # 5, illustrates just how powerful options can be to help you preserve your capital. The versatility and flexibility of knowing how to place just a few options trades can act as a form of insurance on an individual stock or your entire portfolio.
The Put Option
A put option is suitable for an expected decline in stock price.
For example, the owner of a Put Option has the right to sell shares of a stock or ETF at a certain price by a certain date. Remember that the value of a put option rises when the value of the underlying asset falls. This diagram illustrates an example of buying a put option on the SPY, which is the ETF that tracks the S&P 500 index:
Understanding the concept of a put option and applying it at the correct time will mitigate a significant amount of your portfolio drawdown in volatile conditions. Capital protected investments can be easily created with a basic understanding of options. Putting them in place may help preserve your principal – and help you sleep better at night.
“Don’t just sit there and worry. Be proactive. Do something – anything about what’s worrying you, so you can gain information, focus and control over the situation. I ’ve suffered a great many catastrophes in my life. Most of them never happened.”