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How I’m preparing for a stock market crash

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Two weeks ago, I reviewed the risks and challenges facing equity markets, which could lead to a stock market crash in the near term. 

While I concluded that these headwinds could lead to a slump, I also explained that I wouldn’t take any particular action to prepare for this eventuality. 

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Instead, I said I’d continue to focus on what I believe are the “market’s best equities.” 

These included companies such as Diageo and SSE. No matter what happens in the stock market over the next few weeks and months, I think it’s highly likely consumers will still be drinking whiskey and using electricity.

As such, these companies may not see a significant decline in sales and profitability, even if there is a sudden market crash. 

Buying high-quality companies is just one part of my investment strategy. I’ve also been diversifying my portfolio, which I think could help me in a stock market crash. 

Stock market crash protection

Generally, stocks and shares make up the majority of my investment portfolio. This means my portfolio can be pretty volatile, and it may not be an approach that’s suitable for all investors. 

Indeed, some may be more comfortable owning a large percentage of their assets in cash. Other investors may prefer gold or Premium Bonds. There’s no one set formula or investment allocation that works for everyone. 

As I noted above, equity holdings make up the bulk of my investment portfolio. However, recently I’ve been diversifying into different assets. These include gold and inflation-linked bonds.

Rising food and energy prices around the world are starting to concern me. Inflation-linked bonds and gold have historically been some of the best-performing assets in an inflationary environment.

While past performance should never be used as a guide to future potential, I’m happy to own these investments in my portfolio to provide some diversification and protection against a stock market crash. 

Diversification

As well as buying these assets individually, I’ve also acquired a holding in the Personal Assets Trust. This investment trust’s overriding aim is to protect and grow investors’ capital. 

It has an unconstrained investment mandate, which means it can invest in any assets it believes will help accomplish its goals. 

According to its latest investor update, around 8.5% of the trust’s invested in gold. Inflation-linked securities make up a further 32%. 

The rest of the portfolio is devoted to high-quality stocks, which includes Diageo, among others. UK equities make up 8% of the portfolio, while international stocks make up 35%. 

I think the trust’s diversified portfolio will help provide some protection to my portfolio against a stock market crash. The one downside of investing in Personal Assets is that investors don’t get to pick and choose which assets it holds. This could be a drawback for some. 

Still, I’d buy the stock for my portfolio today, alongside the companies outlined at the beginning of this article. 

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Rupert Hargreaves owns shares of Diageo and Personal Assets Trust. The Motley Fool UK has recommended Diageo. 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.

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