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Opinion: These 3 popular investments help manage risk when the stock market gets rough


In July 2022, I wrote a column here about Howard Kornstein, a professional trader with more than 40 years’ experience in stocks, options and futures. At the time, he recommended accumulating shares of Invesco QQQ Trust Series 1
QQQ,
-1.21%

). Kornstein sensed a buying opportunity based on his simple moving-average crossover strategy.

Kornstein bought shares of QQQ at $270.13 per share, after a significant selloff. At the time, he explained that “Many people took money out of the market a few weeks ago as the market went down. Guess what? The market will go back up again, just like it always does.”

He was right. While, his target for QQQ was $350 or higher, Kornstein sold those shares on May 10, 2023 at $325.77 per share for a 55-point gain. Kornstein relied on basic technical analysis to decide when to sell: When the 30-day moving average crossed below its 50-day moving average on May 10, 2023, a bearish signal, Kornstein got out of QQQ. 

Shares of QQQ now trade around $338. Recently, Kornstein said he plans to buy the Q’s once its 30-day moving average rises above its 50-day moving average (a bullish signal).

Less risk, attractive return

If Kornstein is correct, this might be a good time for stock investors to play it safe. That may mean owning less-risky financial products, at least until the technical indicators give an all-clear signal.

If you are a risk-adverse investor who wants the “safest” possible investments, consider a high-yield savings account, a bank CD (certificate of deposit), a money-market account or a U.S. Treasury bond. 

But if you’re willing to accept some risk, consider these three investments: 

1. Dividend-paying stocks: If you are going to invest in the stock market and want high-quality stocks, consider stocks that return money to shareholders in the form of dividends. Corporations that pay dividends tend to be the larger, blue-chip companies. Many people nearing retirement or seeking an income stream like dividend-paying stocks.

Long-term dividend-loving investors are especially attracted to the “Dividend Aristocrats,” or stocks that have paid a dividend for at least 25 consecutive years.

Keep in mind that the prices of high-quality dividend-paying stocks fluctuate. In addition, if a company cuts its dividend, that is a red flag and you should consider reducing or selling the position.

2. Index funds: Index funds are designed to use money pooled by investors to buy a basket (or group) of stocks to track a specific index. The idea behind buying indexes is instead of trying to “beat” the S&P 500
SPX,
-1.05%

or Dow Jones Industrial Average
DJIA,
-0.65%
,
for example, you participate in the gains or losses of the underlying index.   

Index funds are less expensive than actively managed ones and provide instant diversification. The four most popular ETF indexes are QQQ, SPDR S&P 500 ETF Trust
SPY,
-1.05%
,
iShares Russell 2000 ETF
IWM,
-0.28%

and SPDR Dow Jones Industrial Average ETF Trust
DIA,
-0.69%
.
 

3. Selling covered call options: Although options are misunderstood by many people, one of the least risky option strategies is selling covered calls. With this strategy, you generate income from stocks you already own or sell stocks that you no longer want in your portfolio. 

Simply put, this strategy involves selling call options on stocks that you own. In a way, you are “renting” your shares to an option buyer. In return, you receive money (i.e., premium) from the buyer for temporarily giving up control of your stock. 

What is the risk of selling covered calls? If the underlying stock that you own falls by more than the premium received, then you will lose money on the transaction. Even with this risk, selling covered calls is an excellent strategy, but the key is choosing the “right” underlying stock — one that steadily moves higher over the long term (think of the Dividend Aristocrats, for example). 

Michael Sincere (michaelsincere.com) is the author of “Understanding Options” and “Understanding Stocks.” His latest book, “How to Profit in the Stock Market” (McGraw-Hill, 2022) is aimed at sophisticated traders and investors. 

More: Market’s favorite recession gauge has been flashing for longest streak since 1980

Also read: Investors rushing into stocks are wandering into a bull trap, warns Morgan Stanley Mike Wilson and others



This story originally appeared on Marketwatch

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