A market crash is an investor’s nightmare. The world witnessed the most recent market crash induced by the coronavirus pandemic, where indices fell. There have been many such crashes before, like the Financial Crash of 2008, Crash of 1991 due to the Harshad Mehta scam, etc.1
However, history has shown that even if the markets crash, they recover. The major factors that will decide the fate of your portfolio are the decisions you make during the fall. Here are some factors that can protect your portfolio from a possible market crash and help you make meaningful decisions.
6 Ways to Protect Your Portfolio
Following are the ways through which you can protect your portfolio from such possible market crashes:
Diversification is one of the thumb rules of investing. You cannot invest only in a single avenue, especially because of the dynamic nature of the macroeconomic environment. Diversification aims to reduce the risk of your portfolio. To ensure returns and protection, investments should be a mix of equity (risk-based, non-guaranteed but high returns) and debt (moderate returns but lesser risk). Age plays a very important role in determining the debt-equity mix of your portfolio. Additionally, it is also important to invest in life insurance and health insurance products to stay protected in financial emergencies.
Diversification reduces the negative impact of a particular investment on the entire portfolio.
- Be an Active Investor
Being an active investor helps you understand the market movements and their uncertainties. In contrast to passive investing, active investing requires you to keep an eye on the performance of the market. Even though this may take some time, it will help you better understand the market’s mood, which ultimately leads to better investment decisions.
- Unit Linked Insurance Plans
An investment option worth considering is ULIPs. ULIPs are instruments offering twin benefits of insurance and investment. They are similar to mutual funds as both of these avenues invest in the same types of financial instruments (equity and debt). They also offer very similar returns. You are better off investing in ULIPs since they will offer you life cover as well, which can help your family deal with financial problems that undoubtedly, may arise in the event of your unfortunate demise.
- Don’t Panic Sell
When the market crashes, the stock markets witness a steep fall. This causes panic among most investors, who then hurry to exit the market. In a hurry to reduce further losses, they sell their assets. However, if investors learn to control their adrenaline rush and take a moment to reconsider their decision, they will realise that whenever the market falls, it rises as well. It’s just a matter of time.
Rebalancing involves reconsidering your portfolio mix. Rebalancing should be done after considering market performance. For example, during the COVID-19 crisis, equity fell while gold shot up. Therefore, if an investor had done rebalancing during that time, his portfolio would have witnessed growth during the market crash. After the COVID-19 wave, equity markets recovered and saw a huge surge. Timely rebalancing not only reduces risk but also creates a chance to book profit during uncertainties.
- Emergency Fund
Take care not to be caught off guard by a market crash and become so stressed that you cannot even manage meagre expenses. Prepare an emergency fund well in advance to handle uncertainties, such as hospitalisation and outstanding loans. Finance experts advise:
- A good emergency fund amount is 5-6 times your monthly income.
- 0% interest is fine in an emergency fund. You should stick to it.
- You should only use this money in case of an emergency.
Economic turmoil is inevitable; therefore, you must know how to protect your portfolio from a possible market crash. A smart investor will not only survive but will thrive during uncertainties. It depends on their rationality, which will determine the fate of their investments. If you want to diversify your portfolio to reduce risk, you can consider various products provided by Future Generali India Life Insurance.