You don’t need to watch “The Queen’s Gambit” Netflix miniseries to know how complex chess can be. However, if you binge-watched the show like many of us, you might remember the importance of defending the king. Strategies around defense are prioritized to keep your king and your game out of danger. Likewise, when facing turbulent times, a portfolio should have some assets designed to protect it. We can’t control what happens in the market but we can adjust and anticipate what assets can safeguard your investments. 

Understanding which assets are most effective at protecting your investments and learning how to use them can get you closer to safeguarding your finances from any external threats. In this blog post, we will explore six asset classes that can help protect your investment portfolio just like there are defensive chess strategies to keep the king safe. 

Cash 

Strategizing to get the king out of the center is known as castling. Moving your piece to a place where it’s not vulnerable is similar to including an asset such as cash, in your portfolio, that mitigates the impacts that market changes may cause. 

The common advice is to avoid having cash sitting under the mattress. However, in the investment world, think of cash as money sitting in savings or checking accounts at the bank or money market accounts. After years of these accounts paying little interest, you can now get savings accounts and money market rates yielding over 4% (as of April 15, 2023).

The defense: Cash provides a secure way to store money while also allowing you the flexibility to react quickly if market conditions change or new opportunities arise. Cash can also be used to pay off debt or pay taxes on investments. 

Short-Term Bonds 

When the game begins the first pieces you can move are the pawns. Sometimes pawns work like bunkers to protect the king if you position them right. In your portfolio, this strategy may come in the form of bonds that mature in the next few years. Short-term bonds may be a hedge in turbulent times. For example, in 2022, the Federal Reserve’s tightening policies caused bonds to suffer their worst year in 100 years, due to the fast rise in interest rates. 

The defense: Some investors consider bonds a “cushion” when stocks drop. Why is this? Because when investors seek safety, they often turn to short-term bonds, such as US Treasury bonds. As of April 18, 2023, US Treasury bonds of 1 year maturity yield 4.80% and a 2-year maturity yields of 4.18%. Investors can purchase these bonds through some brokerage firms or from the US Treasury at www.treasurydirect.gov

I Bonds 

Take control of the center of the chessboard. Including I Bonds in your portfolio also provides security since they are a combination of safety and growth potential. These types of bonds are in the center of the public eye. They’re issued by the US Government and are frequently mentioned in the press due to the interest rates that an investor could lock in for a short time period – 6 months. The US treasury adjusts I Bond rates each year in March and November by an adjustment called the inflation rate index. 

The defense: The inflation rate index changes based on the CPI, making these ideal for long-term investors since they maximize competitive returns despite higher inflation rates. 

Earlier this year, these bonds yielded 9.62%. They get adjusted by the US Treasury every six months and were reduced to 6.89% in November. I Bonds must be held for a year and have a 30-year maturity. An investor can sell the bonds after the first year by incurring a three-month interest penalty or after five years without a penalty. There is typically a purchase limitation of $10,000 per year per SSN, and they can be purchased directly from the US Treasury at treasurydirect.gov.  

Options 

Options give an investor the right to buy or sell an underlying asset at a specific price within a particular period. For example, a put option gives the investor the right, but not the obligation, to sell an asset at a specific price (known as the strike price) by a specific time – at the option’s expiration. 

The defense: This strategy can serve as a hedge in case the value of the asset declines. 

Options are considered complicated investments with higher risk and are usually more suitable for sophisticated investors who can bear this risk. 

Buffered Exchange Traded Funds (ETFs) 

Just like the chess strategy where you exchange and block pieces that may threaten your king, Buffered ETFs allow investors to add protection (buffer) to limit negative returns. For example, an investor may purchase a Buffered ETF issued in April that tracks the S&P 500 index (not including dividends) for 12 months. This ETF might have an approximate downside protection of 15% when issued, meaning if the S&P 500 index went down 18%, the Buffered ETF would only lose approximately 3%. 

The defense: The upside potential is capped at a certain number in exchange for this added downside protection. The investor will know the downside protection and the cap at the time of purchase. This makes buffered ETFs ideal for those looking for greater protection from downside movements in volatile markets. Keep in mind you’d sacrifice some upside potential, as there is a cap on the potential upside returns from rising markets. 

Fixed Indexed Annuities (FIAs)

Establishing your grounds and giving your enemy anything but a chance to attack with a strong base is known as a blockade. Annuities might have this impact on your portfolio as they are long-term investments. Some have no commissions or surrender charges, and the internal fees on many policies may be lower than on others, especially commission-based ones. 

The Defense: A fixed-indexed annuity is a long-term investment purchased from an insurance company. It allows your assets to grow tax-deferred and provides principal protection in a down market.

For example, returns fluctuate and are based on the performance of an underlying index, such as the S&P 500 Index usually with a upside cap on the amount that can be earned over a contract year. If the index goes down over the contract period the principal does not drop.

Counter-Attack

A Counter-Attack is a defensive chess strategy that consists in attacking your enemy after they attack you. While with your investments are not attacking the market, you are preparing and anticipating for them to fight back. Even though you can’t control the market, you can set up your investments to protect you from external factors. Overprotecting in advance predisposes you to success, you are more prepared for issues that may impact your portfolio. 

Investing can be a risky business – but with risk come growth opportunities. With proper planning and asset allocation, you can protect yourself against significant market losses while still making profits when times are good. Whether it’s cash, short-term bonds, I bond options buffered ETFs or Fixed Indexed Annuities, there are many choices for every investor’s needs.