How I aim to protect my portfolio from a stock market crash

It seems to me as if the risks to equity markets are growing. While the world may be starting to move away from the coronavirus pandemic as a health event, the economic impacts of the disruption are only just beginning to emerge.

Commodity prices have jumped, businesses can’t get the staff they need, and inflation is rising. Against this backdrop, investors are becoming jittery. And the risks of a stock market crash is growing. 

That said, trying to predict the future of equity markets is almost impossible. I can’t tell you whether the market will be higher or lower in two weeks time. The only certainty there is in the stock market is that the market is uncertain. 

Still, that doesn’t mean I shouldn’t protect my portfolio from a stock market crash. That’s just what I’ve been doing over the past few weeks. 

Stock market crash protection

Here at The Motley Fool, we’re long-term investors. We don’t try to guess what will happen to the stock market in the near term. Instead, we focus on the long-term potential of companies. 

So rather than trying to invest in stocks that may do well over the next few weeks, I’ve been buying high-quality growth stocks for my portfolio. I think these companies will protect my wealth from a stock market crash because their performances aren’t linked to the stock market. 

Take drinks giant Diageo, for example. Even if the stock market fell 50% tomorrow, it’s unlikely to have a significant impact on the volume of whiskey, vodka and Guinness consumed around the world

The same is true of companies like Games Workshop. If the stock market plunges tomorrow, this war games miniatures producer is unlikely to see a significant drop-off in demand for its products, which are hugely popular among hobbyists. 

Defensive market

To protect my portfolio from a stock market crash, some other companies I’d buy are renewable energy producers SSE and Greencoat Wind. Once again, it seems unlikely that the demand for electricity in the UK will drop suddenly if the market plunges. As such, while shares in these organisations might fall in line with the broader market, their underlying businesses should continue to perform. 

That’s the strategy I plan to use to protect my portfolio from a stock market crash. This may not be suitable for all investors. These companies may face hidden risks, which could destabilise their business models even though they may not suffer in a crash.

These hidden risks include inflationary pressures, which could increase costs. Rising interest rates could also increase the amount these businesses have to pay to sustain their debt obligations. 

Despite these risks, I’d buy all four of these stocks for my portfolio today. 

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Rupert Hargreaves owns shares of Diageo. The Motley Fool UK owns shares of and has recommended Games Workshop. The Motley Fool UK has recommended Diageo and Greencoat UK Wind. 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.

This post was originally published on Motley Fool

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