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There are several classes of assets that appreciate during most stock market declines. Important thing to remember though is that there are always exceptions to the rule. Take the financial crisis of 2008 for example. While some stock market crashes force more people into real estate, pushing prices of rentals up, last big downturn was caused by the real estate bubble in the first place and it was houses and apartments that took the biggest beating. 

Even the darling of most bears, gold, doesn’t go up every time the stock go down. But in this article, we will cover as many defensive assets that can work as a refuge from declining stocks as possible. Here we go:

1) Bonds

This is by far the most widespread stocks counterbalance for professionally managed portfolios you can find. Everytime markets are on the climb, big institutional investors are dumping some of their bonds (pushing their price lower) and loading up on company shares. For the simple reason, that compared to stocks, bond gains are timid. But when recession hits, markets become too volatile and don’t deliver the usual lofty profits, institutions flock to safer bonds. That being said, there have been exceptions even to this rule.

Best tip: If you are considering to split your money between stocks and bonds, definitely learn how FED adjustments in interest rates are affecting both types of assets.

2) Precious metals

Although gold and silver don’t generate any income stream in the form of dividends or interest, they have other virtues. For one, no gold or silver ever dropped to zero in a history. That can’t be said for some stocks and bonds. Also, these old school metal assets typically go up when their more modern counterparts take a nosedive.

Once you start searching for information on investing into gold, the odds are you will encounter opinions on how only physical gold is truly safe in case of the real meltdown (which is definitely coming in a few short years, according to these doomsayers). Still, consider the cost of protecting those gold bullions or coins (buying a vault for an example), big spreads between buying and selling prices, and the fact that even if those ultimate bears are eventually right and public stock exchange crashes for good, civilization probably ended and you are more concerned with gathering food and ammunition. Would you be able to defend your golden treasure in that apocalyptic crash scenario? For all those reasons above, I am still inclined more towards owning virtual gold. For example the ETF with GLD ticker is very liquid and spreads between selling and buying prices are minimal. 

Gold Bullions Investing

Best tip: Do not trust too much chronic prophets of “financial meltdown.” They all have been right eventually, but track down also their previous predictions of coming collapses that didn’t happen and the stock market posted  another annual record gains instead. 

3) Real Estate

This one is a source of frustration for many small investors. Because it is very hard to make sensible investment into real estate, if you have limited budget. You definitely can’t buy the actual house or apartment. Of course, there are some publicly traded real estate funds and also REITs (Real Estate Investment Trusts). The differences between those two are beyond the scope of this article but you should know that not all of them are created equal. Some of those invest mainly into real estate equity but others are exposed to mortgages and their financial derivatives, in order to boost their dividend yield. Yes, the same derivatives that started the last financial crisis.

Best tip: Be careful with mortgage REITs that might be heavily loaded with risky mortgage derivatives.

4) Inverse funds

These are my favorites when I feel like market is definitely in decline but it certainly doesn’t work as a hedge of your regular portfolio just because it would erase it’s potential profits. Some of them are working as almost perfect inversion of stock index movements. For example SPDN is in the inverse relationship with S&P 500 stock index. When it goes 1% down, SPDN goes 1% up. 

And then we have leveraged inverse ETFs. Most common are 2 times and 3 times shorts. For example SQQQ is great for shorting QQQ (100 biggest tech companies included in Nasdaq index). Every time QQQ goes 1% down, SQQQ goes 3% up. This gives you plenty of leverage to make some nice profits during rough times.Especially, considering that stocks are way more volatile on their way down than usual.

Best tip: Use only if you are betting on a downtrend, not as a hedge against it.

5) Put options

Stock options are definitely an advanced and very risky investment. They are offering a lot of upside but also an easy way to lose all your money. And the stock doesn’t even have to go strongly against you. All it takes is the price level of the underlying stock or index to remain about the same, and option keeps losing value, until it expires worthless. They were originally invested as a hedge against falling stock prices and that is what they are best at.

Still, many people are attracted to their wild volatility, picturing the scenario in which they multiply their initial capital. If you are even considering them, do a lot of research. Learn about different option strategies, how the strike price, and expiration date affects the value and notice the huge spreads between buying and selling.

Best tip: Stay away from options as a speculative investment at least until you can make consistently money in less volatile financial instruments. If you are right about where the stocks are going most of the time, very well. If not, option trading will only accelerate your losses. On the other hand, consider put options as a perfect hedge to insure your stock portfolio against bigger downtrend.

Final Word

One final thing we ought to mention. All the assets above can help you diversify your investment portfolio whether you are expecting a stock market lightly decline, crash heavily, or you just like to play it safe. But the ultimate decision on what to put in a mix and how much of it, lies on you. Some investors are convinced that in the long term, stocks are the best investment vehicle you can get.They go up most of the time.

About Me and this Blog

Hi, my name is Mike and I am an amateur trader and investor. I started this investing blog to share my thoughts, opinions, and a lot of useful information I came across during my journey to become a successful trader.

You can find here articles on traditional methods like technical analysis and money management but also more elusive topics, such as how psychology affects financial markets and our own investing results.