Over the past week or so, the probability of a stock market crash has increased. The main reason for this is the rise of the Omicron Covid variant around the world. What started out in Africa has now had confirmed cases in many countries worldwide. In fact, here in the UK a report confirmed 246 cases over the weekend. With uncertainty over the future rising, here are a few things I’m considering to protect my FTSE 100 stocks against a negative move.
Noting potential risks and rewards
The main characteristic of a stock market crash is a short, sharp fall in the value of the index. Historic crashes have usually lasted for a month or so before finding a bottom and starting to consolidate. It’s impossible to perfectly time the start or the end of a crash.
With this in mind, I can consider preempting a crash in a couple of ways. One would be to note potential risky stocks that I already hold. If I’m in profit on these, I could look to sell some of the profit to have cash ready. Or I can just put these stocks on a watch list and keep a close eye on them.
The second way is to note the potential rewards by using free cash to buy a cheap UK share in the following months. I could even look to buy more of my existing share holdings, to reduce my average buying price.
Buying defensive stocks for a market crash
Another way I can look to protect myself at the moment is through buying defensive FTSE 100 stocks. I can either buy these on top of my existing portfolio, or look to sell some existing high-risk stocks and reallocate the money to defensive options.
Either way, the focus is that defensive stocks should offer me more resilient performance during tough times. This is because most of the sectors in this area see steady consumer demand for the goods or services provided. Examples include supermarkets, tobacco and alcohol companies, and essential retailers.
Unfortunately, a risk here is that even with the best defensive stock in the world, it could see a share price fall with a market crash anyway. This could be not for fundamental reasons, but because investors are selling out of everything, irrespective of whether it makes sense or not.
Looking for different ideas
The final thing I can consider is buying stocks that have exposure to areas that could do well. For example, gold typically has a negative correlation to stocks. This means that when stocks fall, the gold price traditionally goes up in value.
Therefore, I could looking to buy gold-mining stocks. In theory, if the price of gold rallies, the share prices of these companies should also do well.
Overall, I don’t need to be paralysed with dread over the prospect of a market crash. Rather, I can look to take the above steps ahead of any crash happening.
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Jon Smith and The Motley Fool UK have no position in any share mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
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