Protecting and preserving investment capital is equally as important as growing it. Losing less during a significant stock market decline means less is required to bounce back.  

It's hard to recover from big losses. Fortunately, there are a number of downside protection strategies available to investors to help them navigate volatile markets.

Strategic Asset Allocation and Tactical Asset Allocation are the two general approaches associated with risk management.

Strategic Asset Allocation is long-term and invests in broad categories of investments. It involves sticking with an original allocation over long periods of time rather than reacting to what is currently occurring in the markets. So, it relies on diversification and time to “ride out” market downturns.

Tactical Asset Allocation, on the other hand, is a dynamic investment strategy that actively seeks to improve risk adjusted returns by opportunistically adjusting a portfolio’s asset allocation. Long/Short Hedge Funds, Low-Volatility strategies and Downside Hedge strategies may help to mitigate the damage from a significant market decline.

Mitigating loss is just as important as gains in the successful growth of a long-term portfolio. For example, after a 50% drawdown, a portfolio needs a 100% return just to recover the loss. Downside protection strategies may also help limit the time it takes for your portfolio to recover. 

Significant Declines and Recovery Times  

Source: Morningstar

Every time the market experiences a correction, investors like to talk about portfolio protection, but you have to think about a strategy beforehand. The right downside protection strategies can help protect you against significant losses. That’s important in order to preserve the power of your portfolio and allow maximum participation in future gains.


George Kiraly Jr., CFP®, MBA is a NAPFA-Registered Financial Advisor.

Disclosure: George Kiraly Jr., CFP®, MBA is the Founder & Chief Investment Officer of LodeStar Advisory Group, LLC, an independent Registered Investment Adviser located in Short Hills, New Jersey. George Kiraly, LodeStar Advisory Group ("LodeStar"), and/or its clients may hold positions in any ETFs, mutual funds or investment assets mentioned above. Any projections, market outlooks or estimates in this material are forward-looking statements and are based upon certain assumptions that are solely the opinion of LodeStar. They should not be construed to be indicative of the actual events which will occur. Further, any information regarding portfolio composition, portfolio composition methodology, investment process or limits, or valuation methods of evaluating companies and markets are intended to be used as guidelines which may be modified or changed by LodeStar at any time in its sole discretion without notice. Asset allocation and diversification does not assure profit nor protect against loss. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. The above commentary does not constitute individual investment advice. The strategies discussed are strictly for illustrative and educational purposes and should not be construed as a recommendation to purchase or sell, or an offer to sell or a solicitation of an offer to buy any security. This material represents an assessment of the market environment at a specific time and is not intended to be a forecast of future events or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice.

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