Five Rules for Protecting Your Portfolio During Stock Market Declines

An Important Message from Sebastian Leburn, CFA and Chief Investment Officer at Weiss Capital Management

I’m the portfolio manager of the Weiss Bear Strategy, and I believe that given the ongoing stock-market volatility, it’s important to talk about the possibility of further US stock market declines.

Many investment professionals think the risk to stock prices is greatest when corporate profits are declining or unemployment is rising. However, history shows that some of the sharpest and most prolonged stock-market declines began in the best of times.

Others believe that the Federal Reserve can step in and quickly end the sell- off by lowering short-term interest rates, which would add more liquidity to the system. This is effective when the market decline is primarily caused by short-term disruptions in the financial markets, like the 1987 crash or the 1998 fallout.

But when the decline in stock prices is caused by fundamental deterioration in the economy that ultimately leads to a recession, Fed action is rarely enough to protect investors from losses that can last for some time.

How do you know ahead of time? You do not. Which leads me to my main topic:

Five Rules for Protection from Stock Market Declines

Rule #1. Don’t rely on forecasts.

Before a bear market begins, you can count on your fingers the number of economist and analysts anticipating the decline. Then, after the fact, with the benefit of 20-20 hindsight, it seems that nearly half of Wall Street claims to have done so.

But the reality is that modern math and science are ill-equipped to predict discontinuous events like a crash. A more reasonable goal, in my view, is to recognize it after it has begun and then carefully monitor its continuing progress over time.

Rule #2. Remove major biases from the equation.

In other words, objectively recognize when sentiment is causing the market to change direction and work with it. 

Unfortunately, however, during the recent bear market of 2000-2002, the overwhelming majority of brokers and advisers ignored telltale signs and therefore the risks of further declines.¹

Rule #3. Don’t try to protect yourself from all of the risk all of the time.

There are many mutual funds and ETFs available today that are designed to go up in value when a major market index or sector goes down. But like any power tool, you should only use it only when you need it.

For example, consider a fund that’s set up to rise 1% for every 1% decline in the S&P 500 Index. That can serve as a good hedge.

But buying it, leaving it in your portfolio and then just forgetting about it is a mistake, in my opinion. If we’re in a sustained rising market, it will just erode in value.

Rule #4. Manage your hedges intelligently.

When a decline is confirmed, recognize it and then add bear-market hedges. When an end of the decline is confirmed, reduce your bear-market hedges.

These are some of the rules I follow in managing the Weiss Bear Strategy.

The Weiss Bear Strategy is an investment program professionally managed and offered by Weiss Capital Management, an SEC-registered investment adviser.

And unlike an inverse mutual fund or ETF that’s designed to automatically move in the opposite direction of the market, the goal of the Weiss Bear Strategy is to utilize select inverse index mutual funds to profit from declining stock and/or bond markets.

So the primary goals of the Weiss Bear Strategy are twofold:

• Minimize the program’s losses during bull markets
  
  
• Maximize the program’s profits in bear markets

That’s how, even in the long bull-market period from January 1, 2003 through June 30, 2007, we were able to keep losses under control — producing a cumulative total return of -15.61%, net of all fees.

And that’s how, despite the relatively shorter bear-market period from December 31, 2000 through December 31, 2002, we were able to produce a substantial profit — a cumulative total return of 43.27%, net of all fees.

Past performance is no assurance of future results. But our goals for the months and years ahead are unchanged:

• If the bull market continues, we will seek to keep any losses significantly smaller than the loss you’d see if you just bought and held an inverse fund. In fact, our goal is to produce a positive overall result.
  
  
• If we experience a bear market, we will seek to produce a profit that’s significantly larger than the profit you could make simply by holding an inverse fund.

To establish a relationship with our firm, the minimum investment is $100,000; and you can achieve that minimum by combining an investment of at least $50,000 in the Weiss Bear Strategy with one of our other programs.

There are no fees for opening an account. There is, however, an annual management fee of 1.5% on the Weiss Bear Strategy. The program is eligible for retirement accounts. And, naturally, it costs you nothing to get more information and find out if you’re suitable for this aggressive strategy.

You can reach us at 800-814-3045. Or just give us your information by clicking here.

And no matter how you reach us, be sure to review our full track record along with our Important Disclaimers and Disclosures.

Regards,

Sebastian Leburn, CFA
Chief Investment Officer and Portfolio Manager
Weiss Capital Management, Inc.