As volatility rattles global markets, investors are considering steps to protect their portfolios. While a stock market crash sounds scary, being prepared can potentially turn it into an opportunity.
Here are three tried and tested methods of investing during a crash to make the most of it.
Diversify effectively
Diversification doesn’t just mean picking 10 or more varied stocks. To be truly diversified, I believe an investor should think about owning a mix of assets from different classes, sectors and regions. This helps to cushion the portfolio from a downturn in any one area.
Ideally, it should include a mix of equities, bonds, real estate and commodities, in my opinion. For example, bonds and commodities often perform well when stocks decline, providing balance to a portfolio.
A variety of industries is equally important. While technology stocks might be volatile, consumer staples and healthcare sectors tend to be more stable during market fluctuations.
Finally, look at a few international investments to avoid being overexposed to any one country’s economic situation.
Consider defensive stocks
Defensive stocks are shares of companies that provide consistent dividends and stable earnings regardless of the economic climate. They typically operate in essential industries such as utilities, healthcare and consumer staples.
Examples to consider include consumer staples company Unilever, energy supplier National Grid and pharma giant GSK (LSE: GSK). All provide essential services or products that typically remain in high demand at all times.
As one of the UK’s leading pharmaceutical companies, GSK has a solid portfolio and extensive pipeline of products in development. Most recently, its drug Jemperli was approved by the European Commission to treat endometrial cancer. At the same time, it faces the risk of losses from patents expiring and generics flooding the market.
Last week, it entered an agreement to purchase Boston-based clinical-stage biopharmaceutical company IDRx for $1bn. While the acquisition could be hugely beneficial, there’s a risk it doesn’t pay off. That could cost the company dearly, leading to losses and hurting the share price.
But with earnings expected to increase, it has a forward price-to-earnings (P/E) ratio of 10, suggesting room for growth. What’s more, it boasts a higher-than-average dividend yield of 4.8%, injecting added value into the investment.
Maintain a cash reserve
Allocating a portion of a portfolio to cash or cash equivalents provides flexibility during a market crash. This reserve makes it possible for investors to seize opportunities when high-quality stocks are selling at a discount due to the downturn.
It also helps to ensure spare funds are available to avoid having to sell any assets at a loss. Watching a portfolio’s value plummet can lead to panic and irrational decisions, particularly if too much money is at stake. Legendary investor Warren Buffett has been building up a cash reserve recently, leading many to speculate about where the market is headed.
Long-term view
While it’s impossible to predict market movements with certainty, implementing defensive strategies can help to avoid catastrophic losses. Investors who are better prepared for potential market dips are more likely to remain calm and avoid making rash decisions.
An investment journey should be approached with a long-term view, during which time a strategy must adapt to meet changing conditions. Keeping up-to-date with political events and economic trends is key to making sound financial decisions.
This post was originally published on Motley Fool
