What’s a good move to mitigate downside risk with a bearish outlook? - The Stock Market News (2024)

FAQs

What’s a good move to mitigate downside risk with a bearish outlook? - The Stock Market News? ›

Whether you're looking to protect against or profit from a bearish turn, perhaps the most direct approach is to simply "short" the market; that is, sell an asset at a higher price now, with the aim of buying back the same asset at a lower price later.

Downside risk can be mitigated by targeting specific equities that are less sensitive to market movements. Such equities will show low betas, so during a market downturn, their prices do not follow the market at the same degree as the rest of the equities due to low volatility.

Mitigating equity risk to the fullest extent possible involves holding multitudes of stocks and asset classes and doing so in meaningful allocations across the spectrum of global equity opportunities.

For those who don't want to wait, an example of downside protection would be the purchase of a put option for a particular stock, where it is known as a protective put. The put option gives the owner of the option the ability to sell the shares of the underlying stock at a price determined by the put's strike price.

Put options on an index allow investors to hedge downside risk by giving them the option to sell the index at a future date at a set price. If the index falls substantially over the period of the option contract, the seller doesn't have to take on that loss.

Avoidance of risk

Some methods of implementing the avoidance strategy are to plan for risk and then take steps to avoid it. For example, to mitigate risk of new product production, a project team may decide to implement product testing to avoid the risk of product failure before the final production is approved.

Diversify your assets

A simple strategy for managing your risk is to avoid making all of your investments in the same sector. Diversification of your asset classes can assure that a loss in one area will be offset by stability or gains in others.

These can include business risks related to a company's operations, sector risks from market dynamics affecting specific industries, and interest rate risks for fixed-income investments. Diversification across different assets, sectors, and geographies is a key strategy to mitigate these specific risks.

The key to surviving the risks involved in trading is to minimize losses. Risk management in trading begins with developing a trading strategy that accounts for the win-loss percentage and the averages of the wins and losses. Moreover, avoiding catastrophic losses that can wipe you out completely is crucial.

What is downside protection in stocks? ›

Downside protection is when you use certain investment tactics to help protect your portfolio from the negative effects of short-term market events.

Downside protection: With SAFE, the investor's downside is capped at the amount invested since there is no set valuation yet. Equity investors, on the other hand, face the risk of losing most or all of their investment if the startup fails. SAFE thereby offers investors some downside protection.

Investors have many ways to hedge their portfolio, including shorting stocks, buying an inverse exchange-traded fund, or using options. While hedging can reduce risk, it comes at a cost. Image source: Getty Images.

The primary reason for hedging is risk management: attempting to mitigate the extent of potential losses. Rather than closing an existing trade that could move in an undesirable direction, choosing to hedge (e.g., take the offsetting position in an asset) may mitigate potential losses.

Three popular ones are portfolio construction, options, and volatility indicators.

By proactively identifying, prioritizing, and addressing potential threats, project teams can better manage risks and increase their chances of success. The PMBOK Guide's five negative risk response strategies – avoid, mitigate, transfer, escalate, and accept – offer a comprehensive approach to managing project risks.

Key Takeaways. Downside deviation is a measure of downside risk that focuses on returns that fall below a minimum threshold or minimum acceptable return (MAR). Downside deviation gives you a better idea of how much an investment can lose than standard deviation alone.