The FTSE 100 has rebounded following its crash. Yet, investors still fret about the possibility of further market declines. That is not surprising. A recession is looming, and it is likely to be severe. Lockdowns are easing, but the possibility of a new wave of infections could shut economies down again.
It would be foolish to say categorically that equity markets are out of the woods. So what can investors do to protect their portfolios should the FTSE 100, and stock markets in general, fall again?
Other assets are available
If an investor is concerned about the FTSE 100 falling again, moving some of their existing wealth into bond, real estate, and infrastructure funds might be a wise move. Diversification at the asset class level tends to smooth out the changes in overall portfolio value during times of market stress.
An investor in the UK stock market could buy into an international equity fund. Doing this would maintain their exposure to equities, but spread the risk across a few borders.
Instead of investing immediately, cash contributions to a portfolio could be left to build up. If the markets do fall again, there will be ample dry powder ready to snap up even cheaper stocks. However, cash won’t earn much in the way of returns if the markets do not fall.
Time in the market
If markets are expected to be volatile over the short term, then those with brief investment horizons will likely suffer. An investor who needs to cash in when markets have fallen or have not had time to recover will probably lose money.
Stock market investing requires a long time horizon. An investor needs to have sufficient time to allow recovery from market crashes and the flexibility to delay cashing out if the need arises. Regular investing for the long term has been shown to beat trying to buy dips and time the market in the long term.
Spread your bets
Some sectors fared better than others in the last FTSE 100 crash. Energy and airline shares experienced dramatic losses. Utilities and healthcare stocks fared relatively well. The 2020 profits of energy, consumer discretionary, industrial and financial companies are expected to fall more than the average. On the other hand, the forecast for utility, technology, healthcare and consumer staples company profits is better than average.
I am not going to suggest that everyone should move into healthcare stocks. However, I would urge investors to spread their bets across the industries and sectors on offer.
Within the sectors, the shares of individual companies had very different fortunes. It is not enough to pick a company from industry and call it quits. The aim should be to pick the best company but avoid putting too much money in any one company no matter how good it looks. Bear in mind that best might mean having the strongest balance sheet at the moment.
Putting it all together
Stock market investing involves trading risks for rewards. If an investor is worried about the FTSE 100 crashing again, they need to ask themselves how much of their portfolio they want to risk in the markets and be committed to long-term investing. Investments should be diversified across multiple industries and companies. In the long run, this should help protect a portfolio.
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James J. McCombie has no position in any of the shares 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.