There are some signs we could see a stock market crash in the near term. These include increasing volatility in equity markets and a deteriorating outlook for the global economy.
However, I am not worried about a market crash. I have been investing my portfolio to prepare for all eventualities, hoping that even if the market suddenly lurchers lower, I do not need to worry about the impact on my wealth.
Stock market crash protection
There are a couple of strategies I am using to protect my portfolio from a market slump. The first strategy includes diversification. I have reduced my exposure to equities and increased my exposure to corporate bonds.
This strategy has its own risks. The returns from corporate bonds are unlikely to be as high as those from equities in the long run. Still, I think the trade-off is worth making as bonds tend to have more stability in a market sell-off. Indeed, in the past, investors have flocked to bonds in times of uncertainty, pushing up prices. There is no guarantee this trend will repeat itself.
The other strategy I am using is to invest in high-quality defensive companies. I always own a selection of high-quality defensive stocks in my portfolio, but I have recently increased my exposure.
The businesses I have been buying include Diageo and Unilever. Tens of millions of consumers use their products every day. Therefore, I believe that while the value of the companies might fall in a market crash, they will still be highly profitable. I will be able to look past the short-term uncertainty and focus on their long-term growth potential.
Investment trusts
I have also been investing in investment trusts. What I like about these firms is the fact that they can borrow money to invest. They can borrow to invest in stocks when they are falling, increasing returns when the market recovers. There are some risks with this strategy, of course. If a corporation borrows too much money, it could struggle to repay it. Creditors may force the company into liquidation as a result.
I think the potential rewards on offer from investing in these companies far outweigh the risks. That is why I have been buying the Mercantile Investment Trust for my portfolio as a way to invest in a broad cross-section of small and mid-cap UK corporations. The diversification should help me weather any market volatility, with the potential for significant capital gains on the other side.
By using these three different investment strategies, I believe I can insulate my portfolio from a stock market crash. It will never be possible to eliminate risk entirely from my portfolio, but by diversifying my assets and focusing on high-quality companies, I think I can improve my results.