How To Protect Your Stock Portfolio

This month saw dramatic declines in the stock market. But not everyone lost a lot of money. Some people came out alright. I am going to explain what they did differently in this video. WATCH NOW

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Financial Times –

Federal Reserve economic data – Percentage change in CPI (Inflation)

Bloomberg news on Morgan Stanley report


Quick disclaimer: This is not financial advice. Before you invest in the stock market, you should speak with a financial professional.

We need to start by talking about how bad the stock market has been. It has been terrible!

Here is a chart of the S&P500, down 10% in the last month.

Here is a chart of Bitcoin, down 25% in the last month.

Here is a chart of GameStop stock (ticker GME), which dropped almost 50% at one point this month.

One of the drivers of the stock market drop is inflation. Here is a chart from the US Federal Reserve of CPI. This shows inflation, and you can see we are reaching the inflation levels of the 70s and 80s.

Here is a metric that no one is talking about. This chart was published in the Financial Times on Monday. This is from the iTraxx Europe index which tracks a basket of Credit Default Swaps. What this shows is how scared people are that businesses in Europe will not be able to pay their loans. You can see that we are almost at the same level we were at in 2020, at the start of the pandemic.

It is safe to say that things are bad with the economy. But some people are suffering more than others. Specifically, retail investors. Retail investors are ordinary people who are trading on their cell phones using apps like Robinhood. They were buying stocks, like GameStop, are now they are hurting the worst.

There was a report issued by Morgan Stanley that was reported on by Bloomberg last Sunday. In the report, they look at trading information from retail investors. This is a chart from the report, and this is a good example of what has happened. This shows the profits of retail traders versus the S&P 500 index, or their performance compared to the overall market. You see that retail investors did far better than the market during the start of the pandemic. However, since 2021, they have performed far worse than the market. Actually, right now they are sitting at zero percent profit. They have lost all the money they have made if they bought at the beginning of the pandemic. If they bought in midway through the pandemic, they have lost a lot of money.

Let me show you another chart. This looks at Retail investor’s favorite stocks. These were the stocks that got a lot of buzz that everyone was investing in. If you compare the S&P500 since the start of the year compared with what people were actually buying, the S&P500 is down 15%, and the Retail favorite stocks are down over 30%.

What you should take away from all this information is that people are really hurting right now. You should also realize that there is a difference between retail investors and the market. Not everyone lost so much money. In fact, if you look at large, institutional financial firms, they did a lot better than this. I am going to tell you what they did.

It is called Risk Mitigation, and this protects your stock portfolio in times of crisis. You might have heard of diversification. Diversification is not good enough. I am sure many of you were holding a bunch of different stocks. It does not matter if you hold different stocks if they all lose money. Risk Mitigation is a certain type of diversification, where you not only think about the different types of assets you hold, but you also consider the risk level of those assets.

You can think about your portfolio like an onion. There are several layers. On the outer layer, you have the riskiest investments. These are your stocks like GameStop that have the potential to make a lot of money but are also very risky. As you move closer to the center of your portfolio, you hold assets that have less and less risk. These assets are boring, but they are more reliable. You have less of a chance of losing your money. These could be high quality bonds, or US treasuries. They are never going to shoot up in value, but you are also not likely to lose that money.

Here is what happens during a recession. Businesses start to go bankrupt, and businesses start missing their revenue projections. All the investments you are holding on the outer layer of your onion, start falling apart. But if you have a core of investment that is less risky, those funds will stay in place. The result of this, is when the stock market drops, instead of losing 30%, you maybe only lose 1% or 5% depending on the strength of your portfolio.

The better you are at risk mitigation, the better you will be at weathering the storm. So don’t be like this guy. Protect yourself. If part of your portfolio is less risky assets, it is like you have a strong umbrella against the storm.

I am making this video for the retail investors because I see your comments in chat. You say things like, “Why would I invest in something that would only ever give me a 5% return, when I could buy Dogecoin and it is going to the moon?” The reason you purchase investments that give you lower returns, is you are buying less risk. You give up money to pay for stability in the long-term.

Leave a comment down below letting me know what you think!

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Neither Zach De Gregorio or Wolves and Finance shall be liable for any damages related to information in this video. It is recommended you contact a CPA in your area for business advice.