4 Fund Strategies to Protect Your Portfolio From a Downturn

Is the triumphant rise of stocks with every Trump tweet over? Lately, the US president has been in a number of domestic and international quagmires. Whether or not we are heading for a bear market, with or without President Trump’s help, investors should always be prepared for one.

Millennials are the bear-less generation, having lived through a few unnerving flash crashes but never a full market route. Their investments  are tucked away in robo-advisors tracking passive indexes. Over the last decade, the S&P 500 has returned a modest but respectable 7 percent for its investors. As they become restless for higher returns, however, they are being enticed by riskier alternative investments. These bear-beating funds provide the best of both worlds: more excitement with downside protection.

Hang Out With Dividend Aristocrats

Dividend stocks provide a steady income stream through dividend payouts, even when major stock indexes are declining. Stocks with steady dividends tend to have strong fundamentals, and not surprisingly the underlying stocks d better than the market as a whole in a downturn. Several ETFs track stocks that have consistently paid dividends for 25 years or more through the benchmark S&P 500 Dividend Aristocrats Index. In the 2008 downturn, the Dividend Aristocrats (NOBL) lost 22% versus 37% for the S&P 500.

Get Smarter With Smart Beta ETFs

Smart better products invest in factors that are known to be persistent drivers of performance, including size, momentum, value, quality, and volatility. This allows investment strategies to be constructed to more precisely reflect  individual and market risk-return profiles. Let’s look at a bear market strategy using the size factor. The risk premium of large and small capitalization stocks tend to move in cyclical patterns.  A smart beta product with an equal weighted capitalization factor can provide steadier risk-adjusted returns over time through diversification by weight. Over the past 10 years, the S&P 500® Equal Weight Index has delivered returns of 130% versus 106% for the S&P 500® Index.

Invest With the Bears

Active Alts (SQZZ) is the latest bearish sentiment tracker to join the ETF world. The fund shorts companies with strong fundamentals that are expected to trade down in a bear market. These are the same folks behind AdvisorShares Ranger Equity Bear ETF (HDGE), which is shorting retailers among other cyclical stocks. The fund  can and does park 100% of its funds in cash during bull markets, so there is no downside in bull markets, but no upside either. Cleverly, the short squeeze fund has added a monthly income stream by lending out hard-to-borrow securities. Invest with caution; this bearish ETF could be a clever crowd beater but has never been tested in a real world bear market.

Explore Alternative Asset Classes

New asset classes can improve diversification – a proven way to protect a portfolio.  Seeking higher returns, more millennials are investing a slice of their portfolio in hedge funds and real estate. Here is a safer alternative —invest in alternative lending through robo-advisors. LendingRobot can package together thousands of peer-to-peer loans by credit rating. Investors continue to benefit from the discipline of automated portfolio management. Like a traditional robo, this robo will assess your risk profile, assemble the right loan portfolio for you, and periodically rebalance (buy and sell your notes in the secondary market) to stay within your risk parameters.

Millennials are opportunists. They happily abandon traditional financial services for lower costs and potentially higher returns in P2P lending, crowdfunding and other disruptive financial services.

The stock market, on the other hand, can treat disloyal investors harshly. Remaining faithful and not selling out in bear markets is the magic formula of the passive investment funds that outperform active funds over the long term. The fidelity of millennials while their investments are losing value has not yet been tested in a bear market.  The buy-and-hold strategy of your passive robo-advisor is still among the safest bear market offenses.