By the end of the trading day on Monday, August 51, the Dow Jones had fallen -2.6%, the S&P 500 dropped -3%, and the NASDAQ fell -3.4%. The S&P 500 hadn’t seen a drop so severe in almost two years. All three market indices stayed low for a few days, but fully rebounded within a two-week period.
While what happened in early August2 was big, it wasn’t all that rare. The average year since 1980 has had 64 days3 with market moves that exceed 1%. Halfway through this year, there had only been 10. Though future downturns are inevitable, there are strategies for navigating a bear market with less risk.
#1 – Stay Invested
The selloffs that took place on August 5 were classic knee-jerk reactions that snowballed throughout the market. Selling begets more selling. The most important thing to do in a downturn is… nothing. Don’t sell. Stay invested.
Staying invested in a downturn is a generally sound policy because most of the market’s worst days3 over the past 20 years were followed by just as many of its best days. Over the last five years (as of August, 7 2024), the Invesco QQQ Trust (QQQ), an ETF based on the Nasdaq 100 index, has had 35 sessions that have lost at least 3%3. Yet over those same five years, QQQ was up 135%. Downturns happen, but so do rebounds.
It takes a lot of luck and know-how to return to the market right before the comeback and no one gets it right every time. Staying invested is one way to recover by capturing that upside rebound.
#2 – Hedging
Investors can do more than just stay invested and hope the ups outweigh the downs: they can add a hedging strategy to their portfolios.
Contrary to the types of hedge funds that operate within a high-risk-high-reward strategy, two new TrueShares hedge ETFs aim for principal protection in a downturn, reduced portfolio volatility, and even the potential for gains in a downturn.
These two hedge ETFs can be used individually or in tandem to navigate both bull (QBUL) and bear (QBER) market conditions with consistency. When added as accessories to an existing portfolio, QBUL/QBER can offer risk-averse investors unique equity gains potential in high-volatility environments.
They each seek to achieve their goals by emphasizing principal protection in the form of treasury bills* with modest equity exposure via call† or put†† options. In a falling stock market like we saw in early August, the risk of loss for QBER is limited to the cost of the put option if not surpassed by the market’s decline.
However, if the value of the large cap equity market surpasses the put option’s strike price‡, the option finishes in-the-money§ and may generate a positive total return. QBUL and QBER thereby seek to capture 20-40% of large-cap equity market swings in both directions, reducing portfolio volatility in the process.
In the midst of the early August meltdown, the Your Money columnist for the New York Times4 advised readers to “Go fly a kite or wander among beautiful buildings and check in with the market again tomorrow.”
We recommend considering QBUL/QBER for your portfolio and leaving the markets to us.
- https://www.barrons.com/livecoverage/stock-market-today-080524
- https://www.nytimes.com/2024/08/06/podcasts/the-daily/global-stock-market-fears.html
- https://www.etf.com/sections/advisor-center/financial-advisors-try-project-calm-during-market-plunges
- https://www.nytimes.com/2024/08/05/business/stock-market-advice.html
*Treasury bills: a short-dated government security, yielding no interest but issued at a discount on its redemption price.
†Call option: an option to buy assets at an agreed price on or before a particular date.
††Put option: an option to sell assets at an agreed price on or before a particular date.
‡Strike price: the price at which a put or call option can be exercised.
§In-the-money: the option presents a profit opportunity whereby the option holder can buy the security below (call) or sell the security above (put) its current market price.
The TrueShares Quarterly Bull Hedge ETF and TrueShares Quarterly Bear ETF are also subject to the following risks:
- Options Risk. Buying and selling (writing) options are speculative activities and entail greater investment risks. As the buyer of a call option, the Funds risk losing the entire premium invested in the option if the Funds do not exercise the option.
- Derivatives Risk. Derivatives may be more sensitive to changes in economic or market conditions than other types of investments.
- Active Management Risk. The adviser’s judgments about an investment may prove to be incorrect or fail to have the intended results, which could adversely impact the Fund’s performance. QBUL – The adviser’s tail risk strategy may not fully protect the Fund from declines in the market and will not allow the Fund to fully participate in market upside. When the adviser selects out-of-the money call options, the Fund will not participate in equity market gains until they exceed the strike price of the call option. Lower interest rates or higher call option prices will tend to increase the cost of mitigating the risk posed by a decline in U.S. large capitalization equity markets. QBER – The adviser’s tail risk strategy is not designed for upside participation in the markets and will underperform in rising equity markets relative to traditional long-only equity strategies. While the adviser’s strategy is designed to benefit from meaningful declines in the domestic large cap equity market, the Fund will not fully benefit from any given downswing in the market. When the adviser selects out-of-the money put options, the Fund will not participate in equity market declines until they exceed the strike price of the put option. Lower interest rates or higher put option prices will tend to increase the cost of attempting to benefit from meaningful declines in the U.S. large capitalization equity markets.
- Equity Market Risk. Common stocks are susceptible to general stock market fluctuations and to volatile increases and decreases in value as market confidence in and perceptions of their issuers change based on various and unpredictable factors including but not limited to expectations regarding government, economic, monetary and fiscal policies; inflation and interest rates; economic expansion or contraction; and global or regional political, economic and banking crises.
- Fixed Income Securities Risk. When the Fund invests in fixed income securities, the value of your investment in the Fund will fluctuate with changes in interest rates. Typically, a rise in interest rates causes a decline in the value of fixed income securities owned by the Fund. In general, the market price of fixed income securities with longer maturities will increase or decrease more in response to changes in interest rates than shorter-term securities.
NOT FDIC INSURED — NO BANK GUARANTEE — MAY LOSE VALUE
The funds are new with limited operating history.
