3 Ways To Hedge Your Exposure To The Stock Market

You might have heard that portfolio diversification is the key to protecting yourself from any market downturn. There are many ways to diversify your holdings, from investing in bonds to commodities to currencies to real estate. The list goes on. However, not all assets are negatively correlated to the stock market. Said differently, not all assets will go up in price when the stock market drops. So, in this week’s blog post, I will specifically talk about 3 assets that are negatively correlated to the stock market. These 3 asset classes are likely to go up in price when the stock market tumbles, hence protecting you from excessive market losses. Let’s dive in.

Precious Metals 

This asset class shouldn’t come off as a surprise since investors are known to flock to precious metals such as gold and silver during times of distress and uncertainty. Investors like to have precious metals in their portfolio because, unlike currencies, there is only a limited amount of gold out there and government cannot make gold out of thin air. During times of uncertainty, the demand for precious metals is high, which pushes the asset prices higher. Ray Dalio, a billionaire investor, came up with the All Weather Portfolio in which he advises investors to allocate 15% of their portfolio towards real assets such as gold.

Examples of Precious Metal ETFs: iShares Gold Trust (IAU), SPDR Gold Shares (GLD), Aberdeen Standard Physical Silver Shares ETF (SIVR), Aberdeen Standard Physical Platinum Shares ETF (PPLT).
Note: Please look at the expense ratios of these ETFs before investing in them.

Treasury Inflation-Protected Securities (TIPS)

During the great recession of 2007-08, bonds were negatively co-related to the stock market. However, with the low interest rates and the low bond yields, the negative co-relation between bond prices and stock market prices might not hold up. TIPS are the next best thing to have in your portfolio when it comes to conservation of capital during a market downturn. Furthermore, if the Federal Reserve starts printing money to jump start the economy, TIPS should protect you from inflation caused by currency devaluation.

Examples of TIPS ETFs: iShares TIPS Bond ETF (TIP), Vanguard Short-Term Inflation-Protected Securities ETF (VTIP), PIMCO 15+ Year U.S. TIPS ETF (LTPZ).
Note: Please look at the expense ratios of these ETFs before investing in them.

Defensive Stocks

These are the stock that provide a steady dividend and stable earnings regardless of the state of the overall stock market. These stocks are in the healthcare, utilities, or consumer staples sectors. Defensive stocks appreciate in value because investors know that regardless of the market cycle, people are going to get sick, use water/electricity, and consume food, beverages, tobacco, and household items. Additionally, defensive stocks also pay stable dividends, so during a recession, you are likely to have a stead flow of dividend income.

Examples of Defensive Stocks: Johnson & Johnson (JNJ), Altria Group (MO), Coca-Cola (KO), Pfizer Inc (PFE), NextEra Energy (NEE), etc.


Hope you learned a little and found this blog post helpful. We talked about 3 asset types that could potentially help you hedge your exposure to the stock market. As always, you can sign up for our free mailing list here.  You can sign up for our paid subscription services here. Like us on our Facebook page here. Thank you!

Superior North LLC’s content is for educational purposes only. The calculators, videos, recommendations, and general investment ideas are not to be actioned with real money. Vyom Joshi is not a professional money manager or a financial advisor. Contact a professional and certified financial advisor before making any financial decisions. Please review the Disclaimer and Terms and Conditions.

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