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It was the biggest (and strangest) intraday points decline in Dow Jones Industrial Average history.
U.S. stock markets sold off by about 9%. Equities bled out $1 trillion in market capitalization before whipsawing back higher. Within about 20 minutes, the markets had recovered most of their losses.
The 2010 “flash crash” occurred five years ago Wednesday. In honor of the event, CNBC ran a piece called “The simple way to crash-proof your portfolio.”
A guest on the network recommended buying put options on the S&P 500—an index of the 500 largest U.S. companies—as an easy way to hedge your portfolio from a new crash. He also suggested an advanced put option “spread trade” for additional protection.
Regular Daily readers know his suggestions miss the mark. You don’t need to buy “protection,” or follow complex hedging strategies, when you maintain appropriate asset allocation.
Appropriate asset allocation is the No. 1, most critical step you must take to safeguard your wealth.
Then, we further strengthen our safety matrix through appropriate position sizing and trailing stop losses. These three components combine to form the Palm Beach Three-Legged Stool of Safety. These risk-management tools will prevent you from ever putting too many assets in one “basket.”
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If the S&P 500 tanks one day, you’ll still have cash, real estate, precious metals, bonds, options, and other assets to counteract that move. It’s a form of compartmentalization—like a ship with watertight bulkheads. Even if a torpedo blows a hole in one section, compartmentalization prevents the whole vessel from sinking.
If you’re looking for real, sleep-at-night safety, review our 2015 Asset Allocation Guide right away. It’s your blueprint for a crash-proof investment portfolio.