Protecting your investments before a stock market crash
April 23, 2020
Address this before a stock market crash, not after, writes Peter Watson
Protecting your assets is the key to investment success. Perhaps consider diversifying your portfolio with more than one asset class and security type to mitigate downside risk exposure during times of market volatility.
A popular question after severe stock market crashes is how to protect yourself. Good question. Bad timing.
Hopefully the design of your investments is based on an Investment Policy Statement. A document that reflects your financial circumstances and objectives and takes an evidence-based approach to investing.
Here are some simple guidelines on how to structure your portfolio.
First. Depending on your investment profile, some money may be invested in bonds. This will lower your return during a rising market because the expected return of bonds is significantly less than stocks.
The advantage bonds may provide is safety in times of stocks market declines. Assume the stock market declined 10 per cent one day and you have half of your investments in bonds.
If the bonds did not change in value, your overall decline would be reduced to 5 per cent for your entire portfolio.
Second. If you need funds for a specific purpose in the short-term, like buying a house, those funds are better invested in something other than stocks. An investment that is more secured or perhaps guaranteed.
Three. When stocks advance or decline, don’t forget to rebalance your portfolio to your target asset allocation.
Four. Have a high amount of diversification within your portfolio. There has never been a time when stock markets have crashed and not fully recovered, based on indices, not individual stocks, and or gone on to achieve new stock market highs.
Peter Watson is registered with Aligned Capital Partners Inc. (ACPI) to provide investment advice. Investment products are provided by ACPI. ACPI is a member of the Investment Industry Regulatory Organization of Canada. The opinions expressed are those of the author and not necessarily those of ACPI. Peter Watson provides wealth management services through Watson Investments.