4 ways I can try to protect myself against a stock market crash

Global stock markets have been on edge over the past couple of weeks. The September sell-off in the FTSE 100 saw it slump below 7,000 points. Earlier this week, the Nasdaq index recorded the worst daily drop since March. Clearly, there’s some caution in the air with investors worried about the possibility of another stock market crash. As a result, here are several things I can do now to try to protect myself against this.

Thinking about the bigger picture

First, I’d look to review my stocks portfolio in relation to my total assets. I want to make sure that I’m not overexposed to the market in relation to everything else. For example, if 90% of my assets are in stocks (with 10% in cash), I probably need to reduce this. During the good times this overexposure can be beneficial. But if I think a crash is coming, I’m better off being sensible and tweaking this allocation. I’d need to think of other assets. Different assets react differently during times of uncertainty. For example, gold typically appreciates during a stock market crash as it’s seen as one of the supposed safe havens where I can park my money. Of course, I’m still very much focused on my stocks, but being aware of other assets that I can hold that aren’t correlated to stocks is a wise point.

Looking within my portfolio

Within my portfolio I can also look to protect myself against a stock market crash. One way I can do this is by targeting and buying defensive stocks. I recently wrote about some of those that I like. Such stocks include utilities, supermarkets and some other retailers of ‘essential’ goods. 

With these defensive stocks, performance during a stock market crash shouldn’t be as bad as with higher-risk growth stocks. This is because the goods or services offered are necessary for consumers, regardless of the state of the economy.

Aside from defensive stocks, I’d also look to buy dividend stocks. If a crash does come, I could see the whole market taking a hit. If this is the case, then I might not want to sell any stocks until I get back into profit. During this period, receiving income can be a great way to keep my portfolio moving. There’s the risk that dividends might be reduced during periods of stress, but if I buy dividend stocks that are also defensive, I can try for the best of both worlds.

Being ready for a stock market crash

The fourth and final point I need to think about is that attack is the best form of defensive. I want to keep some cash available so that if I do see a stock market crash, I can buy stocks that look cheap. This ties in to my long-term investment mindset that expects stocks to return to a fair value once the panic and dust has settled.

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Jonathansmith1 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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