The Sky is Falling: How to Protect Your Stock Investments

It’s been a wild few weeks in the stock market. You’ve seen the headlines: plunging tech stocks, inflation fears, whispers of a recession, tariffs, trade wars, and hedge funds shorting the market. It can feel like a total disaster is on the verge of happening -- and also that you're powerless to do anything about it. Well, that's not entirely true: many average investors think that they can do something in the face of risk and uncertainty to protect their investments by selling all their stocks, and hoping they're right. But is that the right move?

If you’re like most people, your retirement savings and investments are fully tied to the market—leaving you exposed to huge risk. If the market drops 20%, not only have you lost a lot of (unrealized) profit, this loss could prevent you from finally buying your Dream Home, or force you to delay retirement several years.

Sadly, the Financial Advisory Services (FAS) Industry, as they call themselves, aka "Financial Planners" or "Wealth Managers" among other types, mislead you into believing you are protected through "diversification." If you only buy some more oil and gas stocks, an AI ETF, and some corporate bond mutual funds, you'll be totally safe! But this is not true at all: you're still 100% invested in Wall Street and their products. It doesn't matter whether you have a bunch of apples, a bunch of oranges, or a mix of apples and oranges, you still have a bowl of fruit. And if fruit goes bad, you'll have nothing left.

It’s time to face the facts: the average investor is overexposed to market volatility without knowing it. Stocks rise and fall; bonds rise and fall; real estate rises and falls; crypto rises and falls. Everything goes up and down, but you will never know which one, or when. The key is to build a strategy that is "risk-protected", not one that is simply "diversified" according to the advice sold by Wall Street brokers using 1950s-era "portfolio theory." They're just trying to sell you more of their funds so they can get big commissions and fat year-end bonuses.

In reality, you need to be more strategic -- which is not as hard as it sounds. In fact, it's a weekend DIY project, just like anything you already have on your list for The Home Depot. The only real challenge is learning what that means, and how to do it. Let’s start by understanding the problem.

Why the Market Feels So Risky Right Now 

The stock market is cyclical, but today’s conditions are flashing warning signs. Here’s why:

1. Historical Perspective

• Over the past 100 years, the S&P 500 has averaged 10.8% annual returns, but these aren’t guaranteed, and in some years the market has lost 20-30% or more.

• The market moves through secular bull (long-term uptrends) and bear (long-term downtrends) markets. For example, the market soared in the 1990s but flatlined for most of the 2000s. It's been soaring again since about 2008, but the average "secular bull market" lasts about 18 years. As the current one has been going for nearly 17 years, historically it may be coming to an end. Uh-oh.

2. The Modern Bubble

• The current market P/E ratio (price-to-earnings) of 35-37, depending on the week, is well above the "modern average" of 20.4. In fact, it's significantly higher (2 standard deviations for anyone who passed college Statistics), which suggests that stock prices need to come down by 30-40% -- fortunately this P/E is still lower than past bubbles, so it isn't as dire as it sounds. For example, the P/E ratio before the Dot-Com Bubble burst was 54. So stocks are expensive, and if the air goes out the crash could be painful.

3. Inflation and Interest Rates

• High inflation and rising interest rates have made bonds and other “safer” investments more volatile. Even the traditional 60/40 stock-bond portfolio has struggled, posting one of its worst years in decades in 2022. If you think bonds are safe and a good way to balance risk with your stocks (for example, your TSP is 70% in the C Fund and 30% in the F Fund), that's only true when there is a declining trend in inflation and interest rates. That's what made bonds so great in the 1980s. But today with the Fed pausing interest rate cuts, inflation uncertainty, and the possibility of tariffs and a global Trade War, the next few years could be just as rough for bonds as for stocks. Stock-and-bond "diversification" only works some of the time.

What This Means for You

Even though some numbers look scary while others don't, it's important that you DO NOT PANIC. A high P/E ratio doesn't lead to a stock market crash: the P/E ratio can "normalize" back to 20.4 by either a crash (the "P" goes down) or continued strong earnings (the "E" goes up). In 2025, AI stocks are leading the charge, and this is a brand new technology with unknown potential for applications and profits. If these companies continue to make money with their AI inventions, earnings will grow and the P/E will "compress" back towards 20.4. The "bubble" won't happen, let along pop, and all will be well. The only losers will be the ones who panicked and sold all their stocks, thereby missing out on massive profits.

That doesn't mean there isn't still risk -- it just means the solution isn't panicking. Rather than repeat the same mistakes that have lost investors like you and me billions over the decades, it's far wiser to copy the strategies used by the ultra-rich, the big banks and pensions, and hedge fund managers.

The Solution: True Diversification and De-Risking

To truly diversify you need to move some of your wealth out of Wall Street and invest in truly diverse asset classes, such as real estate. Then you need to build in what are called "defensive measures", which are strategies to help protect core parts of your savings while also building in ways to make money when the market falls. Here are three key strategies to protect yourself against volatility:

1. Real Estate Investments: Build Wealth Outside the Market

While bonds do tend to counteract stocks, the reality is that bonds are super sensitive to interest rates. If interest rates go up, bonds go down along with stocks, and right now that's the biggest risk in the market: stagflation. If growth and earnings stall, stocks will fall; but as inflation sticks around or goes up, interest rates will have to go up -- so bonds will also fall.

Historically, a much better hedge for stocks has been real estate. Real estate tends to follow inflation, meaning that while high inflation is dangerous for bond and stock returns, it generally leads to more profits for real estate investors. Furthermore, when interest rates rise making stocks and bonds less profitable, the big banks, super-wealthy, hedge funds, and private equity move their money into more real estate. For this reason, real estate has the reputation as being the best "hedge" against inflation.

Real estate also provides a tangible, income-generating asset that will hold its value or go up steadily even while stocks, bonds, and cryptocurrencies crash. Even if real estate values (home prices) come down during a recession, investment properties still produce cash flow meaning you can still make money. Even more importantly, during a recession or with high interest rates, more people choose to rent instead of buy, meaning demand for your rental will increase. You can rest assured that you will keep tenants in your property, will earn rental income to help you outlast the recession, and will have no trouble raising rent to boost your earnings even more.

2. Cash and Cash Equivalents: A Safety Net That Pays

If you've been watching the news, you know that the Greatest Investor of All Time, Warren Buffet, is holding record amounts of cash. He thinks (knows?) something bad is coming for the stock market and the US banking sector, and he is stock-piling cash to be ready. Why not copy this genius and save cash yourself?

Most people (and many Financial Advisors) argue against this because they say cash loses value over time because of inflation. Cash in a traditional checking or savings account does, so in those cases they're absolutely right. But you save your money in a High-yield Savings Account (HYSA) or money market fund ad earn 4-5% interest. This keeps your cash value protected from inflation, and is a guaranteed rate of return.

Given the trade-off of earning 4.5% in a HYSA guaranteed or investing your money in bond funds that historically average 5.5% but can still lose 13% in a year, the choice is obvious. If you don't have an HYSA, go open one today. Check out www.nerdwallet.com for some great articles comparing different options.

3. Hedging Strategies: Protect Against Downside Risk

Hedging involves using options or derivatives to limit losses in your portfolio. One option contract equals 100 shares of a stock or ETF, so you can buy or sell options relatively cheaply. For example, an option for 100 shares of SPY that is currently trading for $600 per share can be bought for $6.

The simplest way to protect your investments with options is to purchase "protective puts" for 30 days in the future with a "strike price" of about 10% below the current price. The problem is that if you do this every month at a cost of 1% of your portfolio, over the course of a year you will spend 12% on protective puts: with an average return of 10.8% in the stock market, this results in a net loss!

The smart strategy is using what's called a "risk reversal" which combines buying protective puts and selling covered calls. So long as you own 100 shares of SPY, you can write and sell a "covered call": your 100 shares cover the contract so if the buyer wants to exercise it and buy 100 shares, you have the shares to sell them. The advantage of this is you make money selling your call contracts. From our example above, you own 100 shares of SPY; you purchase a protective put for $6 and you also sell a covered call for $5.50, meaning the total cost of your risk reversal is $0.50 per month, $3.00 per year, or just 0.5% of your portfolio.

If the market crashes 10%, you get to exercise your protective put and sell your shares of SPY for the value of the "strike price." Again with our example, we bought a put with a strike price of $580. With a 10% crash, SPY would have fallen to $540, but your option let you sell for $580, so your loss is $20 instead of $60. But better still, you can immediately buy back all 100 shares for $540, the market price. This way when SPY eventually rebounds to $600, you are already $60 in profit!

BONUS: Buy Gold (and Bitcoin?)

The one other alternative asset class that will protect your wealth through uncertainty, volatility, and recession are precious metals -- and the most important and valuable of these within the commodities market is GOLD. You don't actually buy gold and keep it under your pillow (okay, I guess you could if you wanted, I have friends who have done this), but you buy shares in gold funds. This makes it super accessible and easy to trade.

If you've read the white paper "Bitcoin: A Peer-to-Peer Electronic Cash System" by Satoshi Nakamoto and believe in its value, then you would also agree that Bitcoin is "digital gold" and an equally valuable and reliable hedge as gold. While I personally agree with the concept and invest, I also don't think there's a long enough track record for Bitcoin to prove it, and it remains very risky. As with all investments, you'll have to do your own research and make your own decisions!

Case Study: How Military Benefits Make Diversification Easier

Imagine this scenario:

• Rank: E-6

• Basic Allowance for Housing (BAH): $2,000/month (tax-free)

• Deployment Income: $20,000 (tax-free)

By allocating wisely:

1. Real Estate: Use the VA Loan to buy a duplex, living in one unit while renting out the other.

2. Cash Savings: Deposit $10,000 from deployment income into a HYSA earning 4.5% interest.

3. Hedging: Set aside $1,000 for put options to protect your TSP investments during market volatility.

The tax-advantaged benefits that come with military service mean your dollars go further. If deployed smartly, you can also avoid paying tax on the profits when you sell these investments, meaning you essentially turn even your non-retirement assets into "Roth-like" investments! With these steps, this service member reduces their dependence on the stock market while building diversified, passive income streams.

Why You Need to Act Now

The stock market won’t wait for you to figure this out. If another crash hits, you won't realize it until you wake up and see the S&P 500 is down 10%. At that point, it's too late. It’s easy to fall into the trap of “set it and forget it” with your investments, and that's a great plan for your mutual funds that you buy and hold to create millions of dollars of wealth over 10-, 20-, and 30-year periods for retirement and other Dreams.

But you still have to take action, maybe just 15-20 minutes worth of action per month, to protect these long-term investments against catastrophic losses in the short term. While it may take a few months or a year to save the cash to make your first investment in real estate, you can take immediate action with options and cash:

• Any money you've been saving in the stock market for something you want or need in the next 3-5 years should be moved into cash in an HYSA. In fact, all money saved for purchases in the next 3-5 years should be protected from market risk in an HYSA. For example, if you're planning to leave the service and buy a house in your hometown in 2027, and have $50,000 to do that but it's invested in Vanguard's VOO fund, that needs to be moved to an HYSA ASAP.
• If you are planning to retire in the next 3-4 years, you need to convert 3-4 years worth of retirement income to cash. For example, if you know you will retire in 2026 and will receive $3,000 a month in military pension income and that your monthly expenses are $6,000, you need an extra $3,000 a month from your retirement savings to make ends meet, or $36,000 a year. You should move about $135,000-150,000 out of the C Fund and put it into an HYSA to ensure that you can retire when you want to, and will have enough cash to cover your expenses. Meanwhile, keep the rest of your retirement savings invested in the C Fund to continue getting double-digit returns.
• When it comes to options, the best contracts are the third Friday of every month because that is when there is the most volume. That means you have the easiest time buying the protective puts you want and selling your covered calls -- at the best prices available all month. Simply set up your preferred calendar app on your phone with a task on the third Friday each month to review your current options and buy/sell options for the next month.

Take Control with Military Wealth Coach

Diversifying your portfolio isn’t complicated, but it does require a plan. At the Military Wealth Coach, we help service members like you:

• Create custom strategies to protect against risk.

• Leverage military benefits to build wealth through real estate, cash, and hedging.

• Take control of your finances and prepare for a secure future.

Sign up for a free coaching session to learn how we can help you diversify, protect, and grow your wealth—so you can focus on your mission with confidence.