The ASX 200 is tanking, what can you do about it?

1. The BHP technique

Let’s start with the option most Aussie investors adopt in times of stock market crisis: the BHP Technique. No, it’s not named after the big Australian mining company – it stands for Buy, Hold-in-Hope, Pray.

Ok, I’m kidding a little here – but I propose the BHP Technique is the default option for many of us: you’ve got your CBA, your BHP (the stock!), your Woolies, maybe even an ASX 200 ETF. When the market tanks, you grit your teeth, hold on tight, and hope things eventually turn around (perhaps you also throw in a prayer to the market gods for good measure!).

But the BHP Technique isn’t entirely a joke. For long-term investors, riding out downturns often works. The ASX 200’s recovery post-GFC and post-COVID proves it. But! I suggest it’s not for the faint-hearted – watching your portfolio bleed red day after day tests your nerves – and then there’s the inevitable regret of “Why didn’t I get out earlier?”.

My main issue with the BHP Technique is the uncertainty and pain that comes with it. Using this method, when markets tank – we’re going to get emotional – and we rarely make good investing decisions when we’re emotional. I suspect some of you can remember a time where emotions caused you to sell right at the bottom…

2. Hedging: Playing defence

The other issue I have with the BHP Technique is that it’s not difficult in modern markets to insure our portfolios against a market downturn. So, if sitting on your hands doesn’t cut it, you might look at hedging.

Hedging is a way to cushion your portfolio against a fall. Think of it like insurance: you pay a small amount now to avoid a bigger hit later. Two popular hedging tools used by Aussie investors are options and short-index ETFs.

I’ll leave the investigation of the following options strategies to your research, but these hedging strategies have been used by generations of investors to protect them from both stock-specific and portfolio-wide risk:

• Buy stock specific put option (more comprehensive protection, specific to a holding, up-front cost or “premium”, time erosion works against position, risk limited to premium)

• Buy ASX 200 put option (more comprehensive protection, general/portfolio-wide protection, up-front cost, time erosion works against position, risk limited to premium)

• Write stock specific call option (less comprehensive protection, specific to a holding, no up-front cost (receive premium at start), time erosion works in favour position, potentially unlimited risk)

• Write ASX 200 call option (less comprehensive protection, general/portfolio-wide protection, receive premium at start, time erosion works in favour position, potentially unlimited risk)

Alternatively, one can hedge by purchasing short-index ETFs. These have built into them options, futures, or other derivative instruments whose prices rise when the value of the index in question falls. For example, the price of an ASX 200 index short-ETF will rise as the value ASX 200 index falls.

Here are few examples of short-index ETFs listed on the ASX that investors may look to purchase in times of growing market uncertainty to hedge their portfolios (it’s worth checking the prices of each of these today to see how they’re performing):

Keep in mind there are no free lunches in markets. Hedging’s not foolproof. Timing it wrong or overpaying for protection can backfire. But for those with big ASX exposure, it’s a way to sleep easier when Trump makes his next big policy announcement.

3. Be your own hedge fund: Short selling for profit

Now, let’s crank it up a notch. Why just protect yourself when you could profit from the chaos? Welcome to being your own hedge fund – using short selling to hedge risk and potentially even make a profit as stocks tank.

Short selling* is simple in theory: you borrow shares, sell them at today’s price, then buy them back cheaper later and return them, pocketing the difference.

Say back on 20-Jan, you thought a particular stock was going to be hit hard by Trump’s tariffs; let’s call this stock Santos (ASX: STO). On 20-Jan you short sold 1,000 shares of STO at $7.29. Today, you checked your broking platform and it’s now trading at $6.09. You buy back the 1,000 STO shares (also known as “covering”) to close your short trade. Your initial credit on the 20-Jan sale was $7,290 and your debit on today’s purchase is $6,090 – meaning your short sale profit is $1,290.

Of course, there are transaction and holding costs to consider, but the bottom line is you would have made over $1,200 on STO as it plunged by more than $1 in price. Keep in mind that everyone who employed the BHP Technique on STO over the same period just lost money. Well, we tried to tell them!

The catch? Consider what would happen if STO rocketed to $10 instead, you’d have to pay substantially more to buy it back than you received at the start of the trade. The difference would be your loss. There’s no reward without risk, and the goal with short selling is to increase one’s chances of success by targeting the weakest ASX stocks. In addition, it’s prudent to also adhere to strict risk management (think capital allocation and stop-losses here) – but this could be said of any investing methodology – even for the BHP Technique!

Conclusion: Volatility’s a beast – learn how to tame it

Even the sharpest investors – from fundamentals guru Warren Buffett to technical traders like Paul Tudor Jones – can struggle when markets go haywire. But one can be sure that these legendary investors have a detailed and effective plan for how to protect their risk during market downturns, and how to profit from them.

The ASX 200 is tanking today, sure, but it’s not the first time and it certainly won’t be the last. Granted, history suggests it’ll recover eventually, and how you play it in the meantime – riding it out, hedging, or getting crafty with shorts – is up to you. Just don’t let panic take over (and please, consider stepping up your game from the BHP Technique!).

*The short selling process is handled seamlessly behind the scenes by your broker. First, you’ll need to set up a “stock borrowing facility”. Generally, this is not something discount brokers do – but you can check. Many short sellers also use derivatives like options and contracts for difference (CFDs) to go short – but I will leave the investigation of these instruments to you.