Downside Protection Strategies – Learn the Basics

Many investors set a common goal: to achieve strong returns while incurring minimal risk. However, some pay more attention towards the first part of the goal and ignore downside risk. They forget that a solid downside protection strategy is just as important as gaining high returns.

Downside protection is an essential factor to be considered in investments, especially in the risk management area. Financial advisors would recommend putting a lot of thought into minimizing the risk to protect your assets and control the potential loss from fluctuating market trends.

Here are 3 important tips to help determine the best downside protection strategy:

1. Get help from a financial consultant.

If you are planning to get your finances together, it's best to consult experts who study the field and make professional recommendations for you to maximize profits and minimize downside risk. You may search online or ask your investor friends for a reliable company focused on providing downside protection.

In turbulent markets, an average investor may pay more attention towards the gains, but not really to managing risk. If you get professionals to do the work for you, such as doing major research study of the market and monitoring market trends, it will allow you to focus more on the profit and what you can do to increase it.

A company that provides investment management services won't only provide downside protection but will also recommend alternative strategies to achieve specific investment objectives.

For example, you decide that you want to consider entering the field of real estate to diversify your investment portfolio. Employing a real estate investment firm is a great way to protect your assets if a potentially catastrophic event occurs.

Since the real estate market is uncorrelated to the stock market, fluctuations and volatility in the stock market won't directly affect your assets in real estate. And, when you invest in a real estate investment firm, they will help you make portfolio construction decisions to maximize the money you're investing.

For instance, some firms help investors build diverse client portfolios by offering them passive real estate investments that start at $5,000. These are great ways to divide your assets and minimize the risk of loss.

2. Learn the most basic strategy.

Picture this: you have $50,000, and you decide to purchase 1,000 shares of XYZ stock at $50 each. Unexpectedly, the market plummets, and your stocks are at an all-time low. Their market values fall to $25 each. Not only will you have lost $25,000, but you will also have lost the opportunity to protect capital and earn profits somewhere else.

Any good investor will seriously consider having diverse investment portfolios as one of their dominant strategies. The simplest downside protection strategy is diversification.

Tips for Effective Diversification

To do this, you should remember to spread out your money to minimize the risk of losing it all in one place. A major component of diversification is the correlation among your various investments. You should ensure that they don't trend up and down together. If they do, it means your portfolio is not exactly diverse.

Another thing you should do is diversify across asset classes. Better positioned investors allot their money to purchasing assets in equities, fixed-income investments, and real estate properties. A diverse portfolio would have at least 2 asset classes.

Diversification also involves exploring alternative investments. The macro categories under this would be Real Estate Investment Trusts (REIF), which include office buildings, shopping centers, apartment buildings, etc., and commodity investments, which include physical goods like gold, oil, and gas.

Risk Tolerance

Using diversification as a downside protection strategy entails considering your risk tolerance. Generally, the longer the timeframe, the more you can tolerate short-term losses to potentially claim long-term gains.

So, let's say you're an aggressive investor with a timeframe of 30 years or more. Because you're more flexible when it comes to time, you are more tolerant of major risks because you're thinking of potentially bright future results. In this particular approach, some aggressive investors allocate 90% of their assets to stocks and 10% to bonds.

If you're a moderate investor who's looking to claim after 20 years, you are not as tolerant as an aggressive investor because your timeframe is a little shorter. Typically, a 70-30 investment ratio applies to moderate investors.

If you're a conservative investor, you have little risk tolerance because your goals are to claim in 10 years. You don't have a lot of wiggle room to go through short-term losses. That's why most conservative investors invest 50% to stocks and 50% to bonds.

3. Plan ahead.

Protection means preventing risk before it happens. And when you're investing in something, it's best to have a fallback option in case it doesn't pan out the way you expected.

There are many reasons an investor should have a downside protection strategy in place before the unexpected occurs. Market volatility should be enough of a reason to have a protection plan and defensive strategies to secure your assets.

While it may seem like you miss out on opportunities to gain because of the strategies in place, as an investor, it's your responsibility to have an unofficial insurance policy for your assets in case they fail. It makes sense to engage and benefit from these strategies now when the cost of implementing them is low. Don't wait for catastrophic market events and high prices of loss management before thinking about protection strategies.

Striking a good balance is also important here. Your portfolio may have different aspects already, and it may be a good idea to identify which of those need the most protection. It may not be feasible to protect the entire portfolio.

Sometimes, the cost of protection may be more expensive than what you're protecting. There may also be times when the timeframe is too short that it doesn't make sense to have a downside protection strategy for it.

Lyons Fundamental Small Cap Value Strategy

Are you missing out on this market rally? Wall Street has seen a surge in small-cap stocks lately, with the Russell 2000 index climbing over 10.7% in the past month versus 5.5% gains in the S&P 500 and 6.1% uptick in the Nasdaq Composite. This rally coincides with cooling inflation data and hopes for Fed rate cuts in 2024.
We utilize our Fundamental Process, including our proprietary GRAPES valuation model, to screen the universe of mid, small and micro-cap companies, use the link below for more information.

Lyons Small Cap Value Fund >>

Our Award Winning Investment Strategies

...
Lyons Enhanced Yield
Portfolio

Delivering consistent, reliable cash flow, Each position is fully hedged to control downside exposure, Portfolio net yield target of 12-15% annually, Fully liquid No lockup period, no capital calls

View Strategy >>
...
Lyons Tactical Allocation Portfolio (SMA)

Greater long-term upside capture through sustained full market participation and full equity allocations to multi-year, continuous time periods

View Strategy >>
...
Catalyst/Lyons Tactical Allocation (Mutual Fund)

The Fund's objective is to seek total return from long-term capital appreciation.

View Strategy >>
...
Lyons Fundamental Small Cap Value Strategy

Targets long term growth of capital through buying undervalued small and mid cap companies with improving business prospects.

View Strategy >>
...
Lyons Core Portfolio

Investing in income generating common and preferred stocks and corporate bonds with long-term holding periods intended to optimize tax efficiency

View Strategy >>
...
Own a Large Stock Position

Did your advisor say sell and diversify? Keep your stock with Lyons Income Overlay. You don't have to diversify with our cusotmized solution for large concentrated stocks.

View Strategy >>
...
Lyons CoinDesk Large Cap Select Index SMA

CoinDesk Large Cap Select Index (DLCS), designed to measure the market capitalization weighted performance of some of the largest and most liquid digital assets that meet pre-defined trading and custody requirements.

View Strategy >>

DISCLOSURE 1 This statement applies generally to initial purchases of a position. Additional shares of a particular stock purchased at subsequent quarterly rebalances may still remain in short-term holding status (owned for less than one year) at the time of this publication. Broadridge MarketPlace is an investment manager database that serves as an objective, third-party supplier of information. Broadridge MarketPlace's Best Money Manager ranking is a comprehensive survey of institutional money manager performance. To be eligible for recognition as a Broadridge Best Money Manager, performance must be calculated on an asset size, which is at least $10 million in size for traditional US asset classes or $1 million for international and alternative investments. Classifications must fall into one of the categories that Lipper ranks (minimum of 20 contenders). All performance data must be calculated net of all fees. For additional information regarding the criteria used by Broadridge MarketPlace, see Minimum Criteria for Inclusion in Best Money Managers listed in the Disclosure of Lyons Wealth's separate Lipper ranking history document. This material is for the exclusive use of the person to whom it has been delivered, is confidential, and may not be copied, distributed, or otherwise given or disclosed to any person other than your authorized representatives. This material was prepared exclusively for information and discussion purposes and to indicate preliminarily the feasibility of a possible investment opportunity. This material is not meant to be nor shall it be construed as an attempt to define all terms and conditions of any transaction or to contain all information that is or may be material to an investor. Lyons Wealth Management, LLC is not soliciting any action based upon this material, and this material is not meant to be nor shall it be construed as an offer or solicitation of an offer for the purchase or sale of any security or advisory or other service. Lyons Wealth Management ("LWM") began formally tracking its portfolio performance as of April 2nd, 2012. Portfolio composite returns are preliminary and are presented on a time-weighted, size-weighted total return basis using monthly portfolio valuations. The composite returns for each LWM portfolio presented herein include all eligible LWM accounts. To be eligible for inclusion in the LWM composite, an account must be fee paying, fully discretionary, and not part of a broker wrap program. New portfolios that are managed to the Tactical Allocation Portfolio investment strategy and meet the composite definition will be added to the composite when fully invested. The composite is not representative of all accounts managed by LWM. All returns are expressed in U.S. Dollars and are presented net of all fees and expenses. The returns reflect the reinvestment of all dividends and interest. The return information presented herein has not been audited or otherwise verified by an independent accounting firm, and past performance of any LWM portfolio does not guarantee future results. No current or prospective client should assume future performance of any specific investment strategy will be profitable or equal to past performance levels. All investment strategies have the potential for profit or loss. Changes in investment strategies, contributions or withdrawals may cause the performance results of your portfolio to differ materially from the reported composite performance. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will either be suitable or profitable for a client's investment portfolio. Historical performance results for market indices and/or categories, generally do not reflect the deduction of transaction and/or custodial charges or the deduction of an investment-management fee, the incurrence of which would have the effect of decreasing historical performance results. Economic factors, market conditions, and investment strategies will affect the performance of any portfolio and there are no assurances that it will match or outperform any particular benchmark. The information, data, analyses and opinions contained herein (1) may include the confidential and proprietary information of data provider, (2) may include, or be derived from information which cannot be verified by data provider, (3) may not be copied or redistributed,(4) do not constitute investment advice offered by data provider, (5) are provided solely for informational purposes and therefore are not an offer to buy or sell a security, and (6) are not warranted to be correct, complete or accurate. Except as otherwise required by law, data provider shall not be responsible for any trading decisions, damages or other losses resulting from, or related to, this information, data, analyses or opinions or their use. This report is supplemental sales literature.