How to Hedge Against Bear Market Losses

Editor's note: Today, we're sharing a reminder from Porter Stansberry. In this piece – updated from his 2016 Stansberry Digest essay – he explains how to ride out volatility in times of panic. You'll also learn how to view our emergency briefing on Thursday, March 19... where we'll cover what we expect in the markets from here, and why you should own a unique form of "portfolio insurance" right now.

For most of the last 20 years, I've focused on building tools and advisories to help you avoid risk...

You might not have thought of it that way, but that's exactly what I've been doing.

Just read almost any of the newsletters I have written since 2001. You'll immediately see that our flagship Investment Advisory is primarily about reducing investment risk.

We do this by focusing our recommendations on safe, capital-efficient companies. Alongside this core portfolio, we've added a few non-correlated hedge-like investments.

And we often hedge against the market directly... with a small number of short-sell recommendations that will ideally "zig" when the rest of our portfolio "zags."

Most investors aren't comfortable shorting stocks. But as we've seen lately, volatility is back. The Dow Jones Industrial Average officially entered bear market territory yesterday. And it's absolutely crucial that you have a plan for what's ahead.

So I'm advocating that you take significant steps to hedge your portfolio today...

The biggest pitfall for most investors is the tendency to misjudge risk tolerance.

Most subscribers who think they can handle lots of volatility really can't. But if you're reading this and you're thinking, "That's not me. I'm a conservative investor. I don't take big risks with my portfolio," I'd bet you're wrong. Almost every investor I talk to about risk also underestimates the volatility of his or her own portfolio.

Not you, though... right? Well, maybe. Think about your own investment experiences.

What happened in your account from October 2008 through March 2009? Most people who would have sworn they were conservative investors ended up watching their life savings collapse by 50% or more. Most of them decided they weren't "buy and hold" investors after all. (They ended up being "buy and fold" investors.) Holding too much risk inevitably trips up most investors.

I also know from empirical studies of investment results that, contrary to what just about every finance department in the country will teach you, risk simply doesn't equal reward.

Lots of good research out there suggests that a strategy of buying well-financed, low-volatility stocks can beat the market by a wide margin. (If you like original sources, here's a great example.)

Plenty of real-life examples guide our thinking in this area, too. Investing legend Warren Buffett is a classic example. He made nearly 25% a year in the market between 1954 and 2000 by focusing on the least risky businesses to own, like insurer GEICO, beverage giant Coca-Cola (KO), and credit-card issuer American Express (AXP).

It was a brilliant strategy. And it worked, primarily, because he avoided taking risks. He even sold almost all of his stocks in 1969 because he thought the market was too expensive. He didn't buy back in until 1974. Do you think you could avoid making any equity investments for five years just because you thought the market was too risky?

Well, a new bear market is here. Fear of the new coronavirus pushed us over the brink. If you plan to stay invested, you'll need to "tilt" your investing strategy.

One choice you could make is to "lighten your load." You can begin to raise cash when you hit trailing stops. You can take profits on positions where you have gains and you believe tightening economic conditions could lead to falling sales and profits.

Or you can choose the option that's the most likely to allow you to profit from these developments: You can actively hedge your portfolio.

Certain sectors of the market are encumbered by debt and suffering from falling asset prices. Autos, malls, and high-cost oil producers are some of the most prominent examples.

These are great places to find short-sale opportunities to offset your losses...

A short sale is simply an investment to profit when a stock's price falls. When you place a short-sale order with your broker, he will borrow shares from another investor and sell them into the market for you. To close the position, you'll have to buy back those shares and return them to the original owner.

If the stock price has fallen from what you paid, you will keep the difference. That's your gain. (Of course, if the share price rises, you will need to cover the difference and book a loss.)

Having a few short sales in your portfolio is critical to protecting your investments when the market is falling. The gains you'll book on those positions will give you a buffer against losses in other areas of your portfolio.

The main problem with shorting is it costs money to borrow shares (usually 4% to 6% a year) and your returns are limited – you can only make 100% even if the company goes bankrupt. But in most market conditions, that's enough to provide you with plenty of protection.

It's one of the best ways to reduce your investing risk. I hope you're using it today.


Porter Stansberry

Editor's note: Right now, you have an even better chance to profit as the market falls – without the limits of shorting. In just the past two weeks, we've used a unique strategy at Stansberry Research to lock in gains of 227%... 137%... and 126%. And we did it during the market's biggest one-week drop since the 2008 crisis.

That's why, on March 19 at 8 p.m. Eastern time, we're airing an emergency briefing to explain this powerful form of "portfolio insurance"... and to discuss the market's next likely moves. Learn how to tune in here.

Further Reading

"In my view, you can't – and shouldn't try to – trade around reasonable declines," Dr. David Eifrig writes. Timing the market is a nearly impossible task. So if you want to sleep well at night, follow these three steps to help your portfolio withstand sudden declines... Learn more here.

Being emotional when the markets are volatile can lead to poor trading decisions. In an uncertain market, it's easy to sell at the wrong time or get knocked out of a position and lose big. Now is the perfect time to take charge and learn to thrive in a choppy market... Read more here.

DailyWealth Premium

Shorting stocks is a strategy that every investor can take advantage of. Here are some of the best places to look for these opportunities...

Market Notes


Today's company is a loser in the ongoing streaming-services war...

Dish Network (DISH) was one of the original innovators in satellite television. But as regular readers know, more and more households are turning to cheaper streaming services and shunning traditional TV packages. And with more competitors like Disney (DIS) getting into the streaming game, this struggling company's troubles aren't over yet...

In 2015, Dish tried launching its own streaming service, Sling TV. But it hasn't been able to keep up. The service only has 2.6 million U.S. subscribers, compared with Netflix's 60 million in the U.S. alone. And this should only get worse... because Dish is hemorrhaging customers. The company lost a total of 388,000 subscribers from its pay-TV, Dish TV, and Sling TV segments in the fourth quarter of 2019. And its customer base is down 2.3 million customers over the past year.

DISH shares are down more than 65% over the past five years. And they've plunged more than 35% in the latest sell-off. As customers keep leaving – and as more competitors join the already intense playing field – this trend isn't changing anytime soon...