Stock market crash: How to protect your portfolio against market fall?

How to protect your portfolio against market fall
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The crash in the stock market does not occur very often but can occur unpredictably. It ruins the interest of the investors and creates a selling panic in the stock market. A fall in the indices for around 10% or more brings the stock market crash but instead of feeling frightened, one must act smartly for protecting one's invested money or losing less. We have tried to bring out the best strategies that will directly help you to sense how to protect your portfolio against market fall? 

Investors have recently experienced a market fall scenario because of the covid crisis, many of them have dumped their investment and booked losses out of their invested funds. But, there were many smart investors who did not panic and stayed calm. They really found this shutdown as an opportunity to enhance their portfolio by adopting the right strategies.

How to protect your portfolio against market fall?

Smart selling and buying strategy

During the market fall selling all your investments and booking losses is not the right approach instead one should fix the portfolio by selling off future underperforming assets. And use that taken out funds for some valuable investments into stocks or debt funds that were rising stars but are undervalued because of the stock market crash. This is one of the common and smartest approaches used by investors.

Let us add more light to this strategy with the help of an example: Suppose the stock market fall by 12%, because of certain infrastructural issues of the nation. Definitely, the worst-hit stocks would be infrastructure, housing, and construction companies. Due to which there would be a lofty impact on the stocks that are widely relatable or linked with infrastructural problems. 

But, there could be various stocks that are corrected only after seeing a consolidation in the market, not because of their own growth. Such as FMCG companies are falling just because of the declining markets and that is the right time to land our money into such assets.

Considering a long-term approach

The second strategy is very helpful if you are having a long-term goal. And it does not really matter if currently, your portfolio is shrinking but what matters is your future approach towards the sectors and the stock you have invested in. An example would work better in getting good clarity on the topic. 

Example: You are having a good number of shares of an automobile company and you have invested into it for a long-term perspective of 10 years. You are bullish on the company and feel that the value will increase with a good number in the future. Then stay invested, don't panic as your approach is long-term and a fall should not be an obstacle for you. Instead, a stock market crash is a great chance to improve your average by adding more shares into your investment basket.

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Be mindful of assets in your portfolio

Being an investor, we would be well aware of the stocks that you are carrying in your portfolio. Seeing the performance regularly you should be quite mindful of which stocks were the great performer in the past and which stocks did not perform as per expectations. Or simply you can calculate the beta to understand the reaction of the shares with effect to stock indices. 

Now, since you are known to the volatility of stocks, the right strategy would be to sell off the past and present underperforming assets for a better portfolio. This is one of the easiest approaches to judge and the best answer of how to protect your portfolio against market fall?

Example: You are having shares of ABC company for the past 12 months and you are not getting good returns as expected or the company is not showing dynamic growth. Then you should take an early step by simply squaring off that stock, even at a loss. Use that liquidity in some good companies that will spring up in the future or infuse that funds into stocks or debt funds in which you have already invested in for enhancing your portfolio.

Go for defensive stocks

Add defensive stocks to your portfolio as these stocks act as a shield to your investment. Let us know what are defensive stocks? These stocks are least affected by the market changes and derive a stable return. One should always keep at least one such investment in the portfolio for being guarded. Mostly the sectors like health care, utility, and FMCG constitute a large number of funds that are least affected by the shaking market.

This does not mean that the stock market crash won't impact the price of these shares but due to high customer dependence on these industries for fulfilling their regular demands makes them a little bearish as compared to others. 

Take away

With the help of this article, we derive a clear understanding of the impact of sharp market fall over the invested portfolio. You might have experienced or heard about big market fall during the years 2000 and 2008, that period was an aggressive correction of the stock markets. That was really a nightmare for the stockmarket players but many get to learn from their mistakes and now acting smartly.

We tried to bring out the best strategies that act as a support to the investors. These points would run as a satisfactory answer to the query of how to protect your portfolio against market fall?

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We are neither a financial advisor nor a wealth creation firm, but bring out the content for the people's awareness. We do not spotlight any company or any investment idea for our readers but the article is simply based on our direct experience and opinion. If you are having any queries related to the topic, you can simply comment to us. Management Guru is always happy to help you!