Legendary investor Warren Buffett was famously quoted as saying that “predicting the rain doesn’t count. Building arks does”. In short, it doesn’t do me much good trying to predict when the next stock market crash could hit. If I’ve got a feeling that it might happen at some point over the next year, then my focus should be on protecting myself. Given that I think we could be in for a rough year ahead, here are several actions I’m taking for my FTSE 100 stock portfolio.
Offence is the best defence
The first thing I’m doing is checking how much free cash I’m likely to to have over the course of the summer and beyond. This isn’t just a good personal finance habit, but rather a tool that can help me with my portfolio.
If I know I’ll have £500 a month for the foreseeable future as spare cash, I can allocate it now and go on the attack. I’d use half of it to continue investing as normal. This way, if the markets goes higher instead of lower this year, I won’t miss out on the profits. This protects my portfolio from meaningfully underperforming the FTSE 100 in general. If I held everything in cash or sold my existing stocks, I’d lose out on this potential.
Aside from buying regularly for the next few months, I want to leave the other half as cash. Some might think that this is a strange idea when I’m talking about trying to protect myself. Yet saving some cash allows me to jump in if we do see a material slump in the stock market.
I can then buy more of the shares I already hold. This will bring down my average purchase price for any of the stocks. The lower my overall price is, the better the chance I have of being able to eventually sell for a profit.
Picking sustainable FTSE 100 dividend options
For the £250 each month that I’m going to keep investing, I’ll focus on dividend stocks. This helps to protect my portfolio as it provides a stream of income that I can benefit from even if my overall portfolio is in the red. I’m happy to avoid picking the highest-yielding shares for the moment in order to focus on the sustainability of future income.
For example, Persimmon currently has a dividend yield of 12.56%. I know that the property market is cyclical, meaning that a recession probably is going to hurt the sector. So even though the income is high, I don’t think I’m going to buy Persimmon shares any time soon.
On the other hand, British American Tobacco has a much lower yield of 6.07%. Yet the company has a strong history of paying dividends, even during previous recessions. I also think that tobacco-related products will se good demand irrespective of the state of the economy.
Dividend income isn’t guaranteed for the future. However, being smart about the companies I choose can help to give me the best possible shot at receiving cash even during tough times.
