During uncertain times such as now, you may be concerned with how to protect your investments against loss. One proven method is to hedge by using short exchange traded funds (ETF). These funds will move in the opposite direction as the index that they track. For example a short S&P 500 ETF will go up 1% for every 1% that the index falls. An ultra short S&P 500 ETF would double the movement of the S&P 500 -- up 2% for every 1% drop.
Ratio Hedge
A ratio hedge can be achieved by buying sufficient short ETFs to protect a proportion of your stock portfolio. A popular ratio would be 25% to 50%. Should the market fall, profits on the hedge can offset 25% to 50% of the losses incurred on your portfolio.
Cashing Out
As the market falls, you can cash sell your short ETFs at a profit. At the markets new lower level your risk of future losses in your portfolio is reduced, resulting in less of a need for the hedge. Should the market recover the ground it lost during the bear market, you can repurchase the short ETFs at lower prices to re-establish your hedge to protect your investments once more.
