Downside Protection

Taking risks can be a charge...until they don't work out. Ugh.

Savvy investors have their cake and eat it too by buying downside protection when that protection is cheap. Downside protection does what it sounds like: protects investors from the downsides that come with risks in investing whatever they chose to invest in.

Downside protection is an umbrella term for multiple types of financial instruments, like options (a derivative security to hedge your bets), stop losses (a protective “setting” you can select when you place a stock order), or investing in assets that are on the opposite path as your current assets, so that whatever happens, you win.

Downside protection isn’t free. Investors pay money for, say, a put option—or the right to sell a security at a given price. They might do that when they have a kind of Boolean-outcome stock: Either the drug cures cancer and the stock goes to $500; or the drug just grows hair on people's knuckles, in which case it goes to $5. Knuckle-combs just aren't that lucrative a business.