3 Ways to Protect Yourself From Falling Equity Prices

If you’re afraid that stocks are overpriced, you don’t need to sell your holdings. These strategies are more effective ways to reduce your exposure.

| More on:
The Motley Fool

There’s no denying that stocks have been on a great run over the past five years, but one has to wonder how long that can last. It now seems that every other day, there’s a new story about how much stocks are overvalued, and that we’re due for a correction.

Does that mean you should sell all your stocks? No it certainly does not – stocks are meant to be held for the long term, and trying to time the market is usually a losing game. Your weight toward stocks should be based on personal factors like your return objectives, risk tolerance, and time horizon.

But there are still ways to protect yourself, even when staying in the stock market. Below are just three examples.

1. Stable stocks

The simplest strategy is to buy companies with stable businesses that ride out economic cycles with ease. One example is Metro (TSX: MRU), the third largest grocer in Canada. Food, of course, is a product that doesn’t fall off dramatically when times are tough, and likewise doesn’t explode in sales during the good times. As a result, the fortunes of Canada’s grocers aren’t very dependent on the state of the economy. Likewise, their equity prices aren’t going to experience as much volatility as most other stocks.

Furthermore, Metro has been very well run over the past two decades, and as a result its quarterly dividend has been raised every year for the past 19 years.

2. Fairfax

If you think stocks are overpriced, you have something in common with Fairfax Financial Holdings (TSX: FFH) Chairman & CEO Prem Watsa. Due to Mr. Watsa’s pessimism, the insurance conglomerate has a very conservative investment portfolio, with a heavy investment in bonds, and the entire equity portfolio hedged.

It’s a strategy that has cost Mr. Watsa and Fairfax’s other shareholders in recent years as the market has rallied. But one only has to go back to 2008 to see what happens when Fairfax’s pessimism pays off. In that year, Mr. Watsa bet heavily against subprime mortgages, and Fairfax stock increased more than 30% in a year when seemingly every other stock fell off a cliff.

It’s unlikely that something that extreme will happen again any time soon. But if the markets do turn south, Fairfax will surely outperform again.

3. Bear ETFs

This third strategy is the most extreme, but also the most effective. Buying a so-called bear ETF is effectively a bet against equity prices, one that will always be effective if the stock market turns south (unlike the two strategies above). The most popular of these ETFs are the Horizons BetaPro S&P/TSX 60 Inverse ETF (TSX: HIX) and BetaPro S&P 500 Inverse ETF (TSX: HIU).

This strategy is best if you’re holding individual stocks, but want to reduce your overall equity exposure. It’s a lot more effective than selling your stocks; it not only allows you to continue betting on names you believe in, but also saves you from hefty trading costs.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Benjamin Sinclair holds no positions in any of the stocks mentioned in this article.

More on Investing

Pile of Canadian dollar bills in various denominations
Dividend Stocks

Got $5,000? 5 Financial Stocks to Buy and Hold Forever

Like any other sector in Canada, the financial sector has picks worth buying and holding in virtually every market because…

Read more »

space ship model takes off
Dividend Stocks

3 TSX Stocks Soaring Higher and No Signs of Slowing Down

Are you looking for TSX stocks that are up but not done yet? These three show that the future looks…

Read more »

Muscles Drawn On Black board
Investing

TSX Success Stories: Yesterday’s Winners That Look Like Tomorrow’s Champions

Celestica (TSX:CLS) and Lundin Gold (TSX:LUG) are 2024 winners that can win big in 2025.

Read more »

customer uses bank ATM
Bank Stocks

2 Canadian Bank Stocks to Buy at a Discount

Some Canadian banks are giving back recent gains. Is the dip a good opportunity to buy?

Read more »

An investor uses a tablet
Investing

Where to Invest $3,000 in 2025

These Canadian stocks are poised to deliver solid financials in 2025 and beyond, enabling them to deliver above-average returns.

Read more »

Investor reading the newspaper
Stock Market

3 Secrets of TFSA Millionaires

Uncover three proven strategies used by TFSA millionaires to build significant tax-free wealth. Learn how successful investors transform their TFSAs…

Read more »

grow money, wealth build
Dividend Stocks

Best of Both Worlds: 2 TSX Champions Offering Growth and 4.5% Yields

These two growth-oriented TSX stocks also reward their investors with attractive dividends so that you won’t have to compromise growth…

Read more »

a man relaxes with his feet on a pile of books
Investing

3 Brilliant Growth Stocks to Buy Now and Hold for the Long Term

These three growth stocks have high-quality operations and significant long-term potential, making them some of the best to buy right…

Read more »