How I’d prepare for a potential stock market crash in 2022

I think the conditions are ripe for a stock market crash in 2022.

I do not make this statement lightly. Many investors, myself included, could end up losing a lot of money in a market downturn (at least temporarily).

However, it seems to me that uncertainty is growing around the world, and this could lead to a market sell-off. 

Stock market crash risks 

There are a couple of reasons why the market might start to become skittish in 2022. 

Last year, central banks unleashed a tidal wave of cash into the financial markets to blunt the pandemic’s impact on the global economy. This strategy worked, but some analysts have become concerned markets are now hooked on cheap money. 

As central banks start to withdraw their support, this could lead to volatility. Higher interest rates may lead to lower equity valuations, and a drop in money printing may lead some investors to reduce exposure to risky assets, like equities. 

Another challenge the market will have to overcome is rising inflation and the supply chain crisis. These factors are pushing up costs for companies, which may ultimately hurt profit margins and profitability. Lower corporate profits could lead to lower share prices. 

As well as the above, the threat of the pandemic is still rumbling on in the background. 

Considering all of the above, I am looking for ways to protect my portfolio in the event of a stock market crash occurring in 2022. 

Protection against uncertainty 

It will never be possible to protect my portfolio from a crash altogether. Still, there are a couple of assets I would buy to protect my wealth from uncertainty. 

The first is the age-old safe-haven, gold. I would invest in this asset through an ETF to protect my portfolio against market volatility and inflation. 

Alongside a gold ETF, I would acquire a basket of high-quality consumer goods stocks. Companies like Reckitt and Diageo own portfolios of well-known brands and have proven themselves over the past two years.

While past performance should never be used as a guide to future potential, I think Reckitt and Diageo’s global reach and strong brands should help them navigate further market and economic uncertainty. 

And I would also add some international exposure to my portfolio by acquiring Apple. This company has a devoted fan base and sells must-have products, plus services on a subscription basis, the latter providing a steady recurring income stream. 

I think these single stocks could be suitable investments to help my portfolio weather a market crash. However, their performance is not guaranteed. If consumer spending suddenly declines, these businesses may also suffer a drop in revenues. 

Diversification 

By adding an investment fund to my portfolio, I think I will be able to overcome some of the risks associated with buying single stocks.

As such, I would also add the LF Blue Whale Growth fund to my investment bucket. I am attracted to this fund as it focuses on buying global companies with high profit margins and competitive advantages. These qualities should help these businesses navigate economic uncertainty. 

The fund approach is not without its risks. If the Blue Whale fund managers pick the wrong investments, I could be exposing myself to more risk without realising it. This is something I will keep an eye on as we advance.

Rupert Hargreaves owns shares of Diageo and Reckitt plc. The Motley Fool UK has recommended Apple, Diageo, and Reckitt plc. 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.