How To Shield Your Equity Portfolio Against A Possible Stock Market Crash.
Shield your portfolio

How To Shield Your Equity Portfolio Against A Possible Stock Market Crash.

How To Crash-Proof Your Portfolio

I believe every investor NOW has plenty of arguments as to why this bull market may run out of gas soon after reading my previous article. ARE WE SITTING ON A TIME BOMB IN THE MARKET ?! ARE WE HEADING FOR A STOCK MARKET CRASH.

Over past one month, we have witnessed that the overall market is volatile, most of the stocks are seen to have too much of fluctuation. Market looks unstable and unpredictable in terms of price movements.

In case of market meltdown, hard earned savings could be wiped out in a very short period. It is true that there is no point in timing the crash, it will be unannounced whenever it comes. Things remain hidden until they are exposed. Like the stock market crashes that dawned upon in year 2000 & 2008, neither of us were aware of the year, the month and the reason of crash. Though the reasons of crash were not same, but the signals were similar. Now it is important to stay alert and be ready with some strategy so as to not lose much.

Whenever there is real turbulence in the market, traders knows how to make profit even out of that scenario. Trader can make money in both way swings. It is the investor who has to actually take care of. Investor makes money only in Bull Run, loses in bearish. Falling market is also supported by gravitational force. Stocks fall 3 times faster than they rise. High volume is required to take stocks up, but with very less volume, stocks fall.

If you are looking for tips to handle stock market crash/volatility, here are a few strategies that could help you handle it efficiently. NOT MONEY MAKING STRATEGIES THIS TIME BUT MONEY SAVING STRATEGIES. 

Option – 1 – Zero Beta

To me getting less return against possible high volatility, is a worthwhile idea. Portfolio may fetch 14-15% return in the current market scenario but against a very high risk. We are at a stage where market looks very expensive. This strategy is for the one who wants to earn but do not want to lose a penny. In that instance even 7-8% risk free return seems to be a better idea.

Strategy – Convert your total portfolio temporarily into debt based mutual funds or in banks deposits (Few banks are offering good rate for deposits, one of the private bank is offering 7.71% currently, NCD’s available at 8.5%). You will still earn 50% return but with zero risk for the time being. Later convert your debt funds back to equity (Lowering your average purchase cost or increase in holding)

This is the simplest Strategy where you earn with zero risk. (Simplest, Risk Free yet profitable)

Option – 2 – Lock Portfolio Value

While I started writing this, I came across an investor who holds KEI Inds, purchased at 34, CMP Rs 418.6 holding 2400 shares. Holding period return is 1131%. He holds many other stocks too, I recommended him this strategy.

A generalized practice with most of investor is that they will not sell when market is moving upwards (bullish phase), but they exit when market is going down (bearish phase). It is a normal tendency to be hopeful that investment will give more gains, if held for some more time. There’s nothing wrong in it. But there has to be some exit plan too. Now you will argue this citing example of Infosys, Wipro and many other companies which rose XX times. I am sure you have read those millionaire stories ‘How 10000 invested in xxx became xx crores after xx years’. After reading those stories you also dream it to happen to your portfolio as well, don’t you? But remember those millionaire stories worked with only those who bought and forgot. The one’s reading this article are surely not those types. Like every other investor even when I buy something, I buy in a hope that it will become XX times, but a fact that should not be ignored here is what goes upside will slide down. It can never be one sided movement. And always keep asking a simple question, what is the probability?

Strategy – At this point you portfolio is showing certain value. Keep strict stop loss to the overall investment (not stock wise). Here I am suggesting having a pre-determined overall portfolio value below which you will exit from all the stocks.

Say for eg. If your total portfolio value right now is Rs 12 lakhs (Here Rs 12lakhs is the current market value, not the capital investment) and you don’t want to lose more than Rs 2 lakhs from current value. Keep a Stop Loss at Rs 10 lakhs to total portfolio value, keep tracking your portfolio value and as soon as it touches Rs 10 lakhs, exit and sell all your stocks. Re-enter once market stabilizes.

(I recently adopted this strategy against my Crypto Holding. I along with my friend purchased XRP (Ripple) at 0.23$ in equal quantities in Dec17 & also some other crypto. I was doing research about crypto since Sept17 and was so lucky to enter at a very right time. In just one month (Jan’18) it was 3.65$. Super profits – 16 times (1500% profit) of investment. Profit was huge at that point, but still market sentiments were positive, everyone was eyeing a confirm 5$ (because people were buying at that rate) and prediction of crypto pandits was that it will soon will reach 10$, we decided not to sell. I adopted this strategy and had predetermined Stop Loss value of my portfolio. My Stop loss was hit and I sold everything. My friend still holds. I ended up making 6 times profit. You would be surprised to know the current value, it is just 0.33$. I gained, he regrets.

Had I not adopted this strategy, even i would have lost my earned gains like many of my friends.

Option – 3 – Insurance

Insurance is an indemnity contract, basically you pay some amount to be protected against a risk, not to gain. While you buy motor insurance you already know you are going to lose the amount of premium. And just for the sake of not losing the premium, you do not want your vehicle to meet an accident.

Earlier two strategies were the simplest to follow, doesn’t require any knowledge or experience. Can be used by anyone, even a beginner can apply above strategies to their portfolio. This isn’t going to be easy with this option. You ought to have both, knowledge and experience in Options Trading.

Strategy – Buy out of money PUT options. The value and units will be based on portfolio value and capacity to lose money. Just like in insurance contract the higher premium you pay, the more cover you get, similar is the case here. Buying Out of money options enables lock in to maximum loss, while the possibility of gain is unlimited (which will compensate loss of portfolio). Here Put can be bought of the same stock (if the stock is traded in F&O Category) or of Nifty Index. A very simple formula to calculate against index is dividing total portfolio by (index value X Lot size). But the selection of strike price will be based on various factors as stated above. In case reader wants help regarding this, can mail me on your portfolio value and I will design an option hedging strategy for you.

Option – 4 – Gold over Equities

Gold gave good returns when the markets crashed last time in 2008 (Gold return from 2008, 1yr= 16%, 2yr= 48%, 3yr= 111%). While equities might go in either direction in a volatile phase, the historic price of gold is mostly seen climbing up during crash. Therefore switching over to gold from equities could be a wise move in order to earn profits in a volatile stock market. But also consider the fact that return in gold over past 5 year is 0% (2013 gold was around 30k and same is the current price)

When the market volatility is on the higher side, you need to reconsider the constituents of your investment portfolio and the size of the investments. Make sure the portfolio consists of fundamentally strong stocks to avoid any ditches due to stock market volatility. Resizing the investment is very important at this stage in order to avoid taking unnecessary risks. The larger the investment, the higher is the risk involved in the investment. In a volatile stock market, even a small risk in investment gets magnified manifold, thus increasing your chances of losing money.


If you have a question, leave a comment and let me know.

If you found this post worth, spread it my emailing it to a friend or sharing it on whatsapp/ facebook/ twitter.

Thank u! 🙂

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