This month’s cover article discusses multiple challenges that are aligning to increase market risk in 2022. If a person is convinced by those arguments and wants to add protection to their portfolio, what’s the easiest way to do so?
The traditional answer to this question would be to adjust the portfolio’s stock/bond allocation. Stocks are significantly more risky than bonds and the two tend to move in opposite directions during market crises. So historically, the way to reduce risk in anticipation of a potential bear market in stocks has been to reduce the portfolio’s stock allocation and increase bonds.
While this portfolio re-allocation approach is still appropriate, recent regulatory changes have opened the door for retail investors to utilize risk management tools formerly available only to hedge funds and other accredited investors.
These tools offer the potential to add downside protection with minimal disruption to the rest of the portfolio. This can be beneficial tax-wise (for example, stock gains don’t need to be realized by selling positions in order to shift to bonds). If nothing else, it’s typically more convenient to add a single new ETF to an existing portfolio rather than reconfigure the whole thing.
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