Four tips to protect your portfolio in a bear market

How to react when markets tumble is something of a million-pound question. But there are things you can do, and lessons to be learned when indices turn red.

Markets have already faced dramatic falls. But panic selling as valuations crater is not a good idea. Here are some tips to get you through the bumpy ride.

1. Don’t panic

Panicking and fire-selling your holdings is disastrous. It is what is called “crystallising” losses. When you buy an asset in the first instance, such as a fund or investment trust, you are holding units or shares of those assets. While the cash value of those assets might be collapsing, you still hold x amount of that asset.

If you have done your due diligence with your investments beforehand the message is simple – don’t become a panic seller. Stock markets do experience short sharp falls. But they also tend to recover and grow again with time. The value of your assets will rebound, selling them now will just wipe out your money permanently.

2. Use a crash as an opportunity to take stock

Likewise, ignoring your portfolio completely can be a problem, especially if there is something in there that maybe shouldn’t be. Consider if any of your investments no longer fit the reasoning behind your purchase.

Further, be frank and open in your discussions with partners or other family members about what is happening to your portfolio. They will be aware that the markets are in trouble. Hiding what is going on in your portfolio is akin to hiding debt – it doesn’t help anyone.

Ensure those around you understand too that markets can be volatile, but values usually recover over time.

3. Make sure your portfolio is diversified

How well diversified you are should generally relate to your age and closeness to retirement. People starting out with their investment journey will typically have portfolios much more geared towards equity markets – and therefore could be experiencing the most severe falls. This is ok. You are young enough to recover and improve that value.

For older investors, diversification is much more important. Bonds and even alternative assets such as gold or cash make a good diversifier when equity markets are experiencing fear. These alternatives should shield your portfolio from the worst of the falls, and preserve more of your money.

For those investors relying on drawdown from their portfolio, having a cash buffer to fall back on is a good idea. This can be used for income in the short term until the worst of the market turmoil passes. It will also stop you from forced selling of assets if you need cash.

Likewise, assets that pay an income, such as bond funds and income-focused investment trusts can be an interesting option. Investment trusts in particular have a good record of protecting capital and maintaining dividend payments during crises. Look out for so-called ‘dividend hero’ trusts that have a continuous record of paying.

4. Keep an eye out for bargains

There is no doubt that the fabled ‘buying opportunity’ will eventually present itself to investors ready and waiting with cash. But ‘catching a falling knife’ is no mean feat, so you should approach taking on new assets carefully.

That being said, there will be funds and companies out that have been caught up in the panic, but are fundamentally strong and profitable entities. These kinds of investments can make for a good opportunity.

But ultimately, the past performance of markets is no indication of how things will progress in future. Investing is about time in the market not timing the market. Unless your reason for owning an investment has become fatally flawed, staying committed can prove worthwhile during turbulent times.