In the wake of this week’s share rout, shell-shocked investors are pondering what action they should take to protect their capital – or whether doing nothing is the best long-term gambit.

It’s a familiar conundrum, given the market implodes every decade or so. But it doesn’t get any easier and even seasoned investors won’t have a clue whether we’re heading into a grinding bear market, or set for another miracle Covid-era style comeback.

For younger investors, the ‘doing nothing’ scenario isn’t such a bad gambit, presuming their portfolios aren’t filled with speculative resources or tech plays. Over history, the market never has failed to surpass its previous record high.

But older investors in or approaching retirement may not have the luxury of time to wait for such a recovery – and not all cycles are the same.

Novice investors might be comforted by the market’s extraordinary recovery from a 30 per cent plus fall in the space of four months. The greybeards will remember the grinding decade-long recovery from the depths of the global financial crisis in 2009.

In theory, jittery investors should be increasing their cash buffer, in view of re-investing in equities when the damage is done (not that anyone rings a bell at that juncture).

The trouble is, with ‘trimmed mean’ inflation running at 3.7 per cent – and rising – risk-free bank deposits are going backwards. Canstar cites the best three year rate at 3.9 per cent and five years at 4.15 per cent (both with AMP Bank, seeing you asked).

A combination of debt and equity, bank hybrids have always been popular. The National Australia Bank is raising $1 billion via its Capital Notes 6, with the floating yield set at a 3.14 per cent margin to the 90 days bank bill rate (currently 1.51 per cent).

That’s a healthier 4.65 per cent yield, but one of the downsides of hybrids is that investors are not covered by the federal deposit guarantee scheme in the case of a catastrophic bank failure (and anything is possible).

Gold, perhaps? The lustrous metal is the enduring store of value, after all. While the gold price hit a record of just over $US2000 an ounce in early March, it’s marked time over the last year. Gold is favoured by high inflation, but the conundrum is that high interest rates tend to be unfavourable.

Having some bullion exposure makes sense, either directly, quasi directly (through passive exchange traded gold funds) or by way of ASX-listed gold producers.

The latter can result in returns well above the performance of bullion, but they can also suffer alongside other sectors in indiscriminate sell-offs.

Push me, pull you

Many investors prefer to stay in equities even though they fear more losses. One reason is not to incur capital gains tax, given they are likely to be well ahead despite the pull-back.

One device is to hedge against further losses with ETFs that are designed to move in sync with the market – but in the opposite direction. This is done by taking a ‘short’ position on the relevant share market futures.

For instance, Betashares Australian Equities Bear Hedge Fund (BEAR) will gain between 0.9 per cent to 1.1 cent, for every one per cent decline in the ASX 200 accumulation index.

For the true grizzlies, the “strong bear” version (BBOZ) exaggerates this movement: for every one per cent share market decline, the fund returns 2 to 2.75 per cent. Sadly, the reverse is true so the nervous Nellies are severely crimping their returns if – or should that be when – the market recovers.

Similar vehicles are linked to the performance of the US market. For instance, ETF Securities offers the Ultra Short Nasdaq 100 Hedge Fund (SNAS), which uses leveraged strategies to increase the extent of both gains and losses.

Such a fund might appeal to investors who think the tech sector decline (and thus the Nasdaq sell-off) is yet to run its course. But the underlying mechanics are complex.

As we said, patient, younger investors might prefer to eschew such protection which – like all insurance – comes at a cost.

This story does not constitute financial product advice. You should consider obtaining independent advice before making any financial decision.