Trying to predict what the future holds for stock markets is always a challenging call. However, right now, it’s harder than it has been for some time to tell where stocks might go over the next few weeks and months.
The uncertainty of Brexit, the trade war between China and the US, weakness across European economies and civil unrest in countries across the world, are all factors clouding the outlook for economists and companies.
With uncertainty growing, here are the three moves I’m making right now in these weak stock markets to position my portfolio for further instability.
Focus on quality
The first move I’ve been making over the past 12 months is shifting my investments away from domestic small-cap stocks into internationally diversified blue-chips.
I’ve been doing this because, while it’s difficult to tell what the future holds the UK economy, I’m pretty confident that over the next five or 10 years, the global economy will only continue to grow.
One strategy I’ve been using as part of this shift is investing in international income funds, which own baskets of both UK and global income stocks. I reckon these holdings should allow me to ride out any volatility at home while still benefiting from growth overseas.
As well as moving away from small companies in my portfolio, I’ve also been buying some fixed income. As a long term investment, bonds tend to underperform equities, so they’re not really the best instrument to use if you have a 10- or 20-year investment horizon.
That said, bonds can provide a degree of stability in an uncertain environment, and bond prices tend to move inversely to equities. In other words, bond prices tend to rise when stock prices fall.
I’m hoping that if there’s a sudden market crash, bond holdings will go up in value. And I can sell them at a profit to take advantage of falling stock prices and buy high-quality stocks at reduced prices.
Cash is king
Bonds are an excellent way to reduce volatility in your portfolio, but cash is, without a doubt, the safest asset class there is. It’s always best to have enough cash on hand to cover living expenses for at least six months. That way you don’t have to worry about digging into your portfolio to raise money for day-to-day spending.
It’s particularly important to make sure you have enough cash on hand to cover any unforeseen expenses in weak stock markets. You don’t want to have to sell your shares to fund day-to-day spending after a sudden market decline, as you could be forcing losses on yourself.
Having enough cash on hand can help you ride out the volatility and keep a long term mindset in uncertain markets.
The bottom line
Trying to predict what the stock market will do in the short-term is virtually impossible, so it’s best not to try. Instead, a better strategy is to build your portfolio with a long term mindset by owning high-quality blue-chip stocks and keeping cash on hand to cover any unforeseen expenses. These factors become even more critical in weak stock markets.
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Rupert Hargreaves owns no share mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.