The best course when stocks slide is for investors to stand pat, but ‘put’ options are one way to hedge against a drop and lock in some profits
5 min
The past five years have been good to stock-market investors. The S&P 500 index has climbed an annualised 12% during that period, outstripping the 9% annualised gain over the past 40 years. This year alone the index is up 6.9% as of April 26, tacking on to the 24% gain in 2023.
But signs are emerging that the stock market could be due for a breather. As of April 25, the S&P 500 went 133 trading days without a decline of at least 10%, according to PNC Institutional Asset Management. To be sure, that’s still short of the 172-day average since 1928. But the S&P 500 has jumped 24% in the past six months (about 180 days), which buttresses arguments for a correction.
What’s more, the multiyear ascent has arguably sent stocks to overvalued levels. The S&P 500’s forward price-to-earnings ratio—a gauge of market valuation based on earnings estimates for the next 12 months—registered 20 as of April 26, exceeding the five-year average of 19.1 and the 10-year average of 17.8, according to FactSet.
“A correction is certainly possible,” says Jack Ablin , chief investment officer at wealth-management firm Cresset Capital, pointing to the high valuations and the prospect that rate cuts will come later than expected thanks to inflation that has been higher than expected.
Given the danger of a stock-market correction, commonly defined as a 10% to 20% drop, how can investors guard the profits they have made in recent years?
Assuming you have a well-diversified portfolio and aren’t counting on the money from your stocks to finance an imminent expense, financial advisers say the best strategy is to hang tight.
Corrections generally don’t stick around long. Since 1985, declines between 10% and 20% for the S&P 500 have lasted only 97 days on average—three-plus months—according to a CFRA analysis of S&P data.
It then has taken the market an additional 101 days on average to recover the ground lost during the correction. So in about six months, investors tend to be back where they were before the correction.
“If there’s a shallow correction of 5% to 10%, we recommend riding it out,” says Karim Ahamed , an investment adviser at wealth-management firm Cerity Partners. “Eventually the market recovers. The idea of selling out and climbing back in is difficult to achieve. You’re more likely to stay on the sidelines with your losses crystallising.”
The S&P 500 did fall more than 5% in recent weeks, from March 28 to April 19.
Some people, though, simply find it impossible to do nothing if they fear a correction is looming. At the least, they want to protect the gains they have earned so far. What’s the most prudent way for them to reduce their market exposure?
Keep in mind that most actions you can take to guard your stock profits carry a cost. The easiest method, selling stocks, subjects you to capital-gains taxes unless you are selling from a tax-advantaged retirement account. That tax rate varies according to your income, but will likely be 15%.
One way to limit the burden is through tax-loss harvesting, says Amanda Agati , chief investment officer of PNC’s asset-management group. That is when you sell stocks at a loss, lowering your net capital gain. If you have any dogs in your portfolio—stocks with poor fundamentals—you can unload those.
If you do sell stocks, you could put the proceeds into a money-market fund for now, financial pros say. Many such funds yield 5% or more, far higher than rates over the past 15 years. Or if you want to increase the safety of your overall portfolio, you could put the money into safe government bonds. Three-year Treasury notes yield around 4.75%.
If you are going to unload stocks, but don’t want to sell right away, you can put in a stop-limit sell order through your brokerage. That order can automatically sell your shares if they slide to a level you designate (they can go below it, too), protecting you from big drops.
Say you bought 100 shares of Tesla at $140, and they are now trading at $165. If you don’t want your profit to disappear in a downturn, you could enter a stop-limit sell order with your brokerage at $150 for some or all of your shares. Those shares can be sold if the price reaches $150, securing some of the gains.
You also might shift your holdings more toward defensive stocks, such as utilities and consumer-staple companies, which generally outperform during market downturns, says Michael Sheldon , executive director of wealth-management firm RDM Financial Group.
PNC’s Agati suggests an emphasis on quality stocks, those with high recurring revenues, strong and dependable profit margins, high cash flow and low debt. These stocks—such as AutoZone and Visa , she says—have lagged behind the leaders of the market’s surge over the past year.
Advisers also suggest looking at “put” options to protect your stock gains. Puts give you the right but not the obligation to sell a security at a preset price by a preset deadline.
Note that we’re talking about a risk-reduction approach here, not the kind of risk-taking—to try to amplify returns— that has been rampant in the options market. The simplest strategy could be to purchase a put option on a market-index exchange-traded fund, such as one based on the S&P 500. You could buy puts on individual stocks rather than an index ETF, but that may get expensive and complicated as each option carries a purchase premium.
Here’s how the ETF strategy would work: First, buy an option that would let you sell the ETF at a price below the current one, protecting you from declines beneath that level. You wouldn’t have to sell the ETF, and you wouldn’t even have to own it. As the S&P 500 falls, the put option gains in value, and you can sell it.
Say on April 16 you wanted to protect 100 shares of SPDR S&P 500 ETF Trust (SPY) from a decline of more than 10%. With the ETF trading at $505 a share, you could buy an option that covers 100 shares for $1,050, or $10.50 a share. You’re paying a premium equal to 2% of your position.
The option’s expiration date is December, and its strike price is $455 a share, or 10% below the current value. The strike price is the price at which you could exercise the option. But generally you sell the option rather than exercising it, so you don’t have to dump any shares, especially if you don’t own them.
If the market doesn’t go down 10% by December, you let the option expire worthless, and you’re out the $1,050 you paid for it. If the market drops more than 10%, you can sell your option at a profit whenever you want until December.
While it might be more lucrative to sell it early, Ablin recommends holding until expiration if you’re using the option to protect your portfolio. “Think of it like homeowner insurance,” he says. “You pay a premium, like a deductible for insurance, and your coverage runs for a term.”
Keeping the option until expiration extends your coverage for the longest possible period.
By using options, you don’t have to sell any of your stocks, which are typically the best asset to generate strong long-term returns. “If you have the wherewithal to hold the S&P 500 for 10 years, your odds of making money are over 90%,” Ablin says.
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Randy Boyagoda’s new novel, “Lords of Serendipity,” delivers a biting satire of cheating, politics and dysfunction across modern universities.
5 min
Administrative cowardice. Rampant cheating. The soaking and scamming of undergrads and grad students. Performative wokeism. Intensifying competition for international tuition dollars from an expansive China.
These are either the latest dire headlines about American higher ed or the myriad subplots of “Lords of Serendipity,” an ambitious new novel by Randy Boyagoda. Unlike most campus fiction, its scope extends well beyond the cloister of the liberal arts classroom to whammy the entire university system, from its financial model to its function within a globalized economy. Along the way, it skewers its lightning-rod targets with a precision too sharp to be considered entirely fictional.
That its author is not only well-versed in satire, having written four other novels in the genre, but is also a professor of English at the University of Toronto and an experienced college administrator, further blurs the lines between comic fiction and brutal fact. It’s the kind of no-holds-barred book only a consummate insider would know to write—but only one who is also conveniently outside the American university system could get away with writing.
“This is someone who’s got the inside dope on what can go on at universities, especially with international students, and what kind of con games are going on,” said Margaret Atwood, a friend and fellow Torontonian.
The novel, like Boyagoda himself, is often very funny—even as the dilemmas its characters face read as tragedy. Its cast includes the bickering members of a Sri Lankan hotel cleaner’s family, insecure American freshmen, dead-end third-tier college professors and their highflying Ivy League counterparts and dispirited university functionaries. An old-fashioned Dickensian tale, it sweeps across continents and campuses, from a classic liberal-arts college to a stand-in for Harvard University to an urban technical school to the dilapidated buildings of a state-run university in Sri Lanka.
“I’m a joyful person,” Boyagoda said in an interview, though he prefers to see his outlook on academia as “hopeful” rather than optimistic. He smiles and laughs frequently. He bikes everywhere. He derives energy from his students and from his four daughters, ages 14 to 20. They help him and his American wife, Anna, also an educator, care for Boyagoda’s father, an immigrant from Sri Lanka who has dementia and lives with the family.
The germ of the novel came to Boyagoda during the pandemic, when he was serving as a vice-dean. An urban legend was circulating about a statistics grad student selling passing grades to international students. The cheating scheme itself may well have been apocryphal, but it felt tantalizingly plausible.
“As a novelist, it stayed with me,” Boyagoda said. “Who would sell grades for a stats course? Why would someone buy grades? What’s motivating them? Why wouldn’t the university be doing something about it?” What he didn’t want to do, he explained, was write “another novel about a creative writing professor and his drama with students.”
In addition to writing novels—the first of which was a finalist for Canada’s prestigious Giller Prize; he’s written eight books in total—Boyagoda teaches literature full-time. For his students next semester, kids raised in a purportedly “post-literature era,” he’s assigning three 700-page novels, he noted mischievously, books by George Eliot, Ralph Ellison and Kiran Desai.
On RateMyProfessors, students remark on Boyagoda’s heavy assignments, tough grading and distaste for cellphones, but also hail his “comedy.” When alerted to these reviews, Boyagoda laughed. “Guilty as charged,” he said.
“Randy’s one of those people in academia who is very well educated but doesn’t have an ounce of superiority about him,” said John Irving, who frequently guest lectures in Boyagoda’s classroom. “It’s amazing to see how willing students are to talk in his classrooms, how little afraid they feel of being mocked or put down—he gets complete candor out of them.”
Negotiating competing interests seems to come naturally to him. Like many college campuses, after the Oct. 7 Hamas attack on Israel, the University of Toronto was embroiled in protests, encampments and discord; part of the school’s response was to convene a working group on civil discourse. Boyagoda was put in charge, serving for two years. It’s the kind of thankless task many professors would flee from, but Boyagoda relished the prospect and thinks the group, which is ongoing, made progress.
He has since pivoted to another formidable academic concern: the waning prestige of the humanities. In July, Boyagoda became the director of the Jackman Humanities Institute and special advisor on the humanities to the dean of arts and science. This fall, he is starting a series of gatherings he calls the Dead Book Club. (Dead writers feature heavily among his favorites: St. Augustine, Dante, William Faulkner, Evelyn Waugh, Saul Bellow.)
“The goal is to encourage students to read for its own sake and have conversation for its own sake,” Boyagoda said. “The importance of the humanities will be revealed to those who participate.”
“Lords of Serendipity,” which publishes next week, reflects Boyagoda’s commitment to the pursuit of knowledge: “I’m supposed to say I learn more from my students than they do from me, but no,” Boyagoda said. “I enjoy sharing my excitement and joy about literature and ideas. There are these moments when you are teaching and you can see someone’s face change because they didn’t know something and then they did. That moment when you’re actually watch someone enlarge themselves is deeply satisfying.”
In literary circles, Boyagoda is often referred to as a Catholic novelist, a description he embraces. “A novelist willing to give shape and voice to contemporary religious experience is needed,” Boyagoda said. “I understand myself as a Catholic novelist, provided that I’m not only a Catholic novelist, I’m also a South Asian novelist and I’m a Canadian novelist. I don’t want to be captive to one label.”
His characters, he said, are subjected to what he calls “Graham Greene character situations.”
“They are trying to do good in a fallen world and realize the most they can do is less harm than someone else would do in that same role,” he explained. “They have to accept they are complicit in something that provides some good thing to others. It’s a very Graham Greene way of thinking about sacrifice.”
The campus green they inhabit is a febrile zone in which lofty ideals and cynicism regularly collide. It’s a place where a traditional holiday college celebration is now an occasion for political protest. Kids freely police one another inside and out of the classroom with social media their constant, ready weapon of choice. International students, knowing their family’s financial futures hinge on their degrees, operate in terror of failure and deportation.
Early readers of the book include Gary Shteyngart and Junot Diaz, both of whom have taught at universities and written comic novels. They each contacted Boyagoda midway through to say, in essence, “You nailed it.”
As biting as “Lords of Serendipity” can be, Boyagoda’s faith in higher education remains undaunted.
“It’s absurd that we live in societies that make the decision to take people between the ages of 18 and 22, when they are most physically capable of contributing to our nations and communities, and tell them, ‘Go away for four years, and read and learn and have conversations,’” he said. “I want students to be aware of what an incredible privilege that is.”
Corrections & Amplifications
Randy Boyagoda is a special advisor on the humanities to the dean of arts and science at the University of Toronto. An earlier version of this article incorrectly said he is a special adviser to the dean of humanities. (Corrected on Sept. 2)
