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Downside Protection

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Downside protection is a cushion against the potential loss resulting from a price decline in a security or market. The challenge associated with downside protection is that downside protection needs to be balanced with upside potential for high returns. For this reason (among other more complicated ones), some investors do not believe in downside protection. Whether or not an investor should consider downside protection depends on several factors, such as how long before the money is needed and if there will be regular withdrawals during that time. The sooner one needs the money and the more often one plans to withdrawal, the more appealing downside protection can be. A common example of downside protection is having a put option on an owned stock.



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