If you have read my books, you realize how awesome it is to have an income-producing portfolio of dividend bearing stocks making you passive income while you sleep. There is no better feeling in the world than realizing you are making money 24 hours a day, without lifting a finger.

The biggest concern I get about this system is the risk. What will happen if the stock market crashes? How will I preserve my wealth? How do I avoid a margin call?

These are valid concerns and I spoke very briefly about it in my book. I realize I need to go a little deeper into this topic.

So here are THREE ways to mitigate a stock market crash. 

Stop

Many online brokerages have a feature that is called a STOP. You can initiate a STOP as a sell transaction that has a limit put on it. This is a contingency that you create that tells the brokerage “I want you to sell my stocks when the price is X” 

So here you would want to determine what you level of comfort is in the event of a bear market. 

You can set any price you wish and it will depend on your tolerance for fluctuations. In the scenario where you are “buy and hold” investing, and you only really care about the monthly dividends, then who cares? Let the stock market crash. You just keep buying as the price falls, and you start to really increase your yield. Sounds pretty good to me. 

If you have ventured into the world of Margin and Leverage, as explained in the book, then you may have a different opinion. 

You could determine the price that the stock would have to be to trigger a margin call, then set the STOP price at or slightly above that price. 

ie. If you have $1000 of a stock and you have leveraged $500. Then your margin ratio is 50%

If the brokerage allows 70% margin then you would calculate the margin call as follows:

500 / .7 = $714.29 <— This is as low as you can go before a margin call

So you would set a STOP order at say, $715. If the price falls to that level, it is automatically sold and you are out of the woods. 

The downside of this is you no longer have stocks earning you money. No big deal, you can wait until the price settles, then get back into the market.

This is the cheapest option, as it is basically free to set a STOP order - but you WILL lose a portion of your equity. 

You can sell just a portion of your stock in order to change the margin ratio as well. The brokerage will do this if you do not make your margin call payment.

You can buy more stock without leverage - this will lower the margin %

You can pay off some of the margin amount owing. This will lower the margin %

Options

As mentioned in the book, options are a cool way to preserve the total value of your portfolio without losing ANY value. It is not free. 

Think of options as a type of insurance policy. You are paying a fee to protect your assts against loss. You would do this for a house or a car, so why not your nest egg?

Options trading can be quite complicated and there are as many ways to mix and match in this world as there are lost socks in the laundry hamper. There are many great books written on options trading and you are free to dive down that rabbit hole as you see fit. We will talk about one very particular Options transaction here: the PUT

A PUT option is the right to sell a particular stock at a set price on or before a particular date. You are now in control of when you sell and how much you may sell that stock for. If the stock price crashes, you are laughing, because you have purchased the right to sell it at a price that you agreed upon when you entered into the options contract. 

Set conservation Margin Ratios

Look at the history of the stock and see how much it fell in the last stock market crisis (say..2008?)

Calculate the price it would likely fall to. Then only leverage to meet the maximum margin ratio at that theoretical price.

eg. If your stock is priced at $100. You could leverage up to $70 at a 70% margin ratio. (Common)

If the price fell by 50% in the 2008 crash, then 70% of $50 is —> $35. 

-If you never borrow more than $35 against that $100 stock, you probably won’t run into trouble. 

Of course, the stock market is unpredictable and nobody has a crystal ball, so I will put this in BOLD type: STOCK INVESTING INVOLVES RISK. Please remember that and act accordingly. I am merely suggesting ways to mitigate risk, not remove risk. 

Now remember, you only lose money on a stock if you actually sell it. If you are not highly leveraged and are happy with the dividend payments you are receiving every month or quarter, then why would you sell a perfectly good stock in a perfectly good company, just because investor sentiment is low at that particular time?  Stay in and keep the cash flow machine pumping!

I highly recommend reading and learning as much as you can about these strategies as I have just skimmed the surface. 

Be sure to read my book “BYOB - Be Your Own Bank” to get some REALLY cool ides as to how to invest and grow your wealth!

in my book Invest in Yourself I suggest many more ways to protect your wealth, grow your money with extremely low risk, and how to pay off your mortgage quickly.

if you want an all in one system that tells you my whole system in a step by step manner, try my online course! I leave nothing out!

Thank You!