Put some dividend-paying stocks in your portfolio. They are a great hedge against inflation and provide terrific portfolio gains in down market cycles. Years ago, during the tech boom, I began adding dividend stocks, such as regional banks and Real Estate Investment Trusts, to my portfolio. The payoff was great! When the tech stocks hit the dust and the market took a downturn, I still was earning some great returns on my dividend stocks. Many investors neglect these companies as they think they are too boring. But what’s boring about making money? (Read more about dividend-paying stocks here.)
Consider buying put options as insurance that any unrealized gains you have don’t turn into losses. These options provide protection by betting that the underlying stock will decline. They give you the right (not the obligation) to sell the stock at a certain price at a specific future time.
Most investors don’t use options because they can be expensive and complex and have a reputation as risky. As well, employing options requires a pretty active style of portfolio management that many investors do not want to undertake. But simple options can help protect your portfolio on the downside and also improve your returns in a bull market. (Read more about put options here.)
There are additional methods for portfolio protection, including trading the VIX, a volatility index, which trades at a low price in steady markets and increases in value in volatile times. And as I discussed in my recent ETF articles, leveraged ETFs also have found a spot in portfolios in which investors are seeking protection against downside risk. However, I think both of these protections are best left for more experienced, sophisticated investors who are willing to be very active managers of their portfolios.
For most investors, following the above steps will help you create a portfolio that will thrive through normal up-and-down market cycles. While an undiversified portfolio can give you tremendous gains — if you are lucky enough to choose only “home-run” stocks — the plain truth is that most investors, individual or professional, don’t have a crystal ball. And stocking your portfolio with just one type of company or sector — no matter how promising — is a recipe for failure in the long term. So, do yourself a favor and take advantage of the tools that are available. And with technology today, it’s never been easier to take command of your investments.
It’s a new year; start it out right!