Stock market crashes and corrections are inevitable and I’m wondering whether one might come sooner rather than later. Frothy valuations and meme stocks, a fevered IPO market, a rush of new, inexperienced investors, and concerns over inflation all suggest it.
Unfortunately, I’ve no idea when this will happen. Positive news on Covid-19 could see markets lurch even higher. Nonetheless, I can plan for it by owning low-beta or defensive shares from the FTSE 100. These tend to be less volatile than the overall market.
Utilities tend to perform better than the majority of stocks during a crash. We wouldn’t get far without water, gas and electricity. My preferred pick from the sector has long been power provider National Grid (LSE: NG). In contrast to cyclical stocks like airlines, NG’s share price recovered quicker than most after the coronavirus market crash.
Naturally, there’s a flip side to this. In more normal times, utilities are unlikely to give some investors the capital growth they’re seeking.
Nevertheless, I think NG is still worth owning. This is particularly the case if I were after a solid, dependable dividend stream to keep the lights on. Right now, the shares yield of 5.5% — far more than I’d get if I kept my money in a Cash ISA.
Like utility stocks, anything health-related also tends to be a good bet. We’re always susceptible to illness, regardless of what stock markets are doing.
When it comes to FTSE 100 stocks, investors have two options: AstraZeneca and GlaxoSmithKline (LSE: GSK). Despite ongoing internal issues, the latter is still my preferred pick. As well as being far cheaper to acquire than its peer, Glaxo’s soon-to-be separate consumer division gives it a string to its bow that AstraZeneca lacks.
Sure, the forthcoming cut to the annual dividend (from 80p to 55p) isn’t ideal. However, this was less than analysts had been expecting. The revised payout should also be sufficient to soothe the pain investors may feel as a result of a wider market sell-off.
A third part of the market that tends to hold its own is the consumer goods sector. This is why FTSE 100 giant Unilever (LSE: ULVR) will always feature on my list of top shares to own for a market crash or correction. People will still eat ice cream, use deodorant and wash their clothes. And thanks to its bumper portfolio of recognisable, sticky brands, Unilever is perfectly placed to cater for this.
For me however, Unilever is a stock that can probably be held for decades without issue. In addition to its global presence, the company has shown it can make consistently excellent returns on the money it puts into the business.
There’s also a decent dividend stream that can be reinvested, allowing holders to benefit even more from compounding. Unilever currently yields 3.4%.
Of course, even the most defensive shares can still fall in a crash. Practically everything tumbled in March 2020. This is why spreading my money around a group of companies, rather than just two or three, is prudent.
If I wanted to be even more diversified, I’d also own other assets, such as bonds and gold. These are unlikely to give me a better return than shares over the long term. But history has shown these tend to rise when markets fall.