Dollar cost average
Instead of going in whole-hog, most experts recommend dollar-cost averaging your way back into the stock market."If you put it all in on one day, the market will probably go down 500 points right after that," Davis says.
Besides warding off stock market calamities, dollar cost averaging allows you to buy more when the price is lower and takes the sting out of buying higher-priced shares.
"Mathematically, when you dollar cost average, your average price will always be lower than the average price of a particular security. (That's) because you're buying more units when the price is lower and fewer units when the price is higher, so you end up with a lower cost overall," says Keator.
Whether it's through dividend reinvestment or regular contributions from your paycheck, dollar-cost averaging takes the pressure out of finding the right time to buy.
Stop losses
For investors that buy individual stocks or ETFs, placing a stop-loss order on the position can mitigate the downside when the stock market goes down.It's basically a preset sell order that is triggered when the stock goes below a certain price. Be careful, though. Sometimes events can happen too fast for them to be very effective. The flash crash from May 6 is a case in point.
"It's not foolproof, but it's something that you use as a piece for protection in a portfolio," says Keator.
Options
Again, for those who invest in stocks or ETFs, options writing may offer a defensive strategy.Buying puts can be useful in addition to covered call writing in a volatile stock market.
A put is basically insurance.
"If you are long equities and you want to protect those equities, you can buy a put on a security and that is like buying an insurance policy. If the stock goes down, you then have the option as the owner of the put to sell that stock at a predetermined (strike) price. So if it goes down lower than your put, you are actually making money," Keator says.
He stresses that it's important to have cash backing the puts to keep your risk defined.
Writing, or selling, a call means that you own a security or index and you're willing to sell it by a certain date at a certain price that's higher than the price at which you bought it.
Options trading is a sophisticated strategy, but it may protect you from losses when done correctly.
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