Investing in a self-invested personal pension (SIPP) is one of the best ways to save for retirement in the UK. With this type of account, an investor can build wealth very efficiently.
But what happens if there’s a stock market crash? Are there ways to shelter a SIPP from a major downturn?
Building a rock-solid portfolio
The answer to this question is yes. But it requires a shift from a growth-oriented mindset to one focused on risk management and capital preservation.
One suggestion is to build a balanced portfolio with a cautious asset allocation. This would mean a range of different asset classes, preferably offering plenty of exposure to those that have a low correlation to stocks (meaning that they don’t fall when stocks do).
Shares aside, the portfolio could include:
- Bonds (either individual securities or funds), which are lower-risk-but-lower-return investments.
- Money market funds, which are designed to offer attractive levels of yield (interest) with minimal risk.
- Cash, which provides an investor with options (like the ability to capitalise on stock market opportunities when they emerge).
- Gold (via ETFs), a classic ‘safe-haven’ asset.
By doing this, investors could minimise the impact of a substantial fall in the stock market.
Buying resilient stocks
Another strategy is to focus on ‘quality’ at stock level. By this, I mean investing in established blue-chip companies with rock-solid balance sheets and stable earnings.
These types of stocks tend to hold up better in a crash. Typically, they fall far less than, say, more speculative penny stocks.
Allocating some capital to ‘defensive’ stocks can also pay off. Here, I’m talking about those in sectors such as Consumer Staples, Healthcare, and Utilities.
One individual name that could be worth considering as a defensive play is Unilever (LSE: ULVR). The owner of a ton of well-known household brands (eg Dove, Simple, Domestos, Persil, Cif, Knorr, Hellmann’s), it’s the largest consumer goods company on the London Stock Exchange.
The beauty of this company is that it’s relatively immune to economic cycles. In an economic downturn, people will still buy essentials like deodorant, clothes detergent, and toilet cleaner, meaning that Unilever’s revenues are usually pretty stable.
Another attraction is that it’s a very reliable dividend payer. Over the years, it has consistently lifted its payout (the yield is about 3.5% today).
Given these attributes, the stock tends to hold up well when markets crash. When things get rocky, it tends to see inflows of capital (especially from institutional investors).
There are no guarantees it will hold up well in future equity market meltdowns, of course. If the economy was to crash badly, consumers may trade down to cheaper supermarket brands.
I definitely see it as a ‘safer’ pick though. I think it’s likely to hold up better than a lot of other stocks in a crash.
Preparing for opportunities
One other key strategy that can be valuable during crashes is to buy shares! This could include reacting to specific index levels and putting money to work in readiness for a recovery. Imagine if the FTSE 100 fell to under 8,000 but later recovered to 11,000.
It could include also entry points for individual stocks (Rolls-Royce under 900p, for instance). For ideas on stocks to consider in a crash, you can find plenty of information right here at The Motley Fool.
