3 Alternative Ways To Hedge Against A Market Downturn

David Goodboy's picture

Monday, June 26, 2017 - 2:30pm

by David Goodboy

What an ideal time to be in the market! Long-term stock investors are reaping the benefits of a massive, eight-year-long bull market. Driven by ultra-low interest rates, fiscal stimulus, economic growth, and a pro-business White House, equities just keep pushing higher. 

No one knows how long these glory days will last. Investors are scrambling to find the safest way to invest right amid mounting uncertainty. Despite the bullish environment, there are a wide variety of bearish pressures that could quickly quash the bullish advance. 

Anything from terrorism fears, geopolitical worries, or overly aggressive Federal Reserve actions could bring the bull market to a screeching halt. Savvy investors are aggressively seeking to diversify and protect their gains. Protecting gains must be on the forefront of everyone's mind as the market keeps climbing the wall of worry. 

The Safest Places To Invest For The Days Ahead

1. Cash
Most people do not consider money itself as an investment. However, cash is the one must-have for any and all investment strategies. As crazy as it might sound, you should consider selling highly profitable stock investments to build your cash reserves. 

Nearly every stock brokerage offers the ability to hold cash in a FDIC-insured account earning market rate interest. Although market rate interest is minuscule compared to the potential rate of return in the stock market, it is, without a doubt, the safest way to invest. 

It's important to note that the FDIC only insures up to $250,000 cash. If you have a greater cash amount, it may be advisable to spread it across multiple accounts to make certain you are covered in the event of an actual black swan-type economic event. 

Cash provides stability, diversification, and sometimes inflation protection. A good rule of thumb is that the more risk-averse and short-term oriented you are, the more cash should be held in your portfolio. The more risk-embracing and long-term your investing philosophy, the less cash you need. 

Allocating to cash is a smart way to manage downside market risk. Also, having a strong cash position will allow you to act quickly to take advantage of new opportunities presented when the bear market emerges. 

2. Peer-To-Peer Lending
Peer-to-peer lending provides diversification away from traditional investments, as well as offering returns that can be as high as 10%.

When approached correctly, peer-to-peer lending can be among the safest ways to invest right now. 

The key to making it safe is to diversify across many loans. Diversification eliminates the risk of default because any single loan you invest in can default without sinking the entire investment. 

Popular peer-to-peer lending platforms include Lending Club and Prosper. What makes it safe is you invest in notes, which are small parts of a single loan, rather than taking the entire risk of any single loan yourself. In fact, you can invest as a little as $25 per loan. This means that a $10,000 investment could be spread across 400 individual borrowers.

Also, investors can choose their risk profile based on the return desired. The old investment truth of the greater the risk, the greater interest earned, and vice versa, remains accurate. In this case, it's the riskier the borrower, the higher the return. 

I consider peer-to-peer lending via a reputable platform the safest way to invest right now while still earning respectable returns on your money. 

3. Fixed-Index Annuities 
Everyone from Tony Robbins to many financial planners have jumped on the fixed-index annuity bandwagon recently. 

Fixed-index annuities, designed to provide lifetime income and protection, are among the safest ways to invest right now. While annuities can be very complicated, a fixed-index annuity is simple in that it pays a predetermined interest rate over a fixed number of years plus additional interest may be credited based on the percentage change in the value of a broad market index.

In others words, the investor will earn a guaranteed return no matter what the stock market does, but if the stock market moves higher, the return increases. 

While evaluating fixed-index annuities, be certain to consider the cap of the index return, withdraw penalties, and tax implications.

Risks To Consider: While I think the above three methods are the safest way to invest right now, there is no completely risk-free investment. An investor should seek to mitigate risk to the greatest extent since it is impossible to eliminate it completely.

Action To Take: Consider increasing your cash position in your stock investing account while determining if annuities and/or peer-to-peer lending are the right investment for your situation.

Editor's Note: This little-known indicator predicted the last market collapse... and can save you from the next one too. Full details here.

David Goodboy does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.