There’s a commonly held belief that if you don’t have your portfolio or self-managed super fund (SMSF) set up properly before the market crashes, it’s too late.

Consider how you might feel if the market were to suddenly lurch lower tomorrow, losing 10-20% of its value in quick time. And valuations both in Australia and the US look stretched on a number of measures.

That doesn’t mean a crash is imminent, but they do occur more regularly than most people expect.

To protect your portfolio during a downturn you need to take several steps BEFORE it occurs.

  1. Make sure you have a decent cash balance set aside to invest into the market should it crash. While it may not pay much in the way of interest in these low-interest times, cash doesn’t lose its value (apart from the effects of inflation) so is partly a hedge if your portfolio is smashed. It also allows investors to pick up shares on the cheap – without being forced to sell other stocks at lower prices.
  2. Make sure your portfolio is well diversified. And that doesn’t mean holding shares in 3 or 4 of the big four banks either. It means different companies in different sectors, different ways of earning income as well as different and varied sources of income such as offshore.

Focusing on the second part, here are 10 stocks that would make up a diversified portfolio base, as well as offering stability if the market crashes. That means holding a number of so-called defensive stocks that provide earnings no matter what stage the business cycle is in.

Company Market Cap ($m) Last Price
Telstra Corporation Ltd (ASX: TLS) $67,363 $5.51
Wesfarmers Ltd (ASX: WES) $47,950 $42.58
Woolworths Limited (ASX: WOW) $30,006 $23.47
Macquarie Group Ltd (ASX: MQG) $26,532 $77.96
Sydney Airport Holdings Ltd (ASX: SYD) $16,520 $7.41
TPG Telecom Ltd (ASX: TPM) $10,724 $12.64
Ramsay Health Care Limited (ASX: RHC) $15,499 $76.70
Sonic Healthcare Limited (ASX: SHL) $9,210 $22.19
Reece Ltd (ASX: REH) $4,035 $40.52
Reliance Worldwide Corporation Aus P Ltd (ASX: RWC) $1,701 $3.24

The stocks I’ve selected should offer plenty of protection during a downturn. Telstra, Wesfarmers and Woolworths all offer products and services we use in our everyday lives from the mobile network to the broadband connection, food, petrol and groceries that are essential. You can add TPG Telecom to that list too.

Investment bank Macquarie now generates a large portion of recurring, annuity type fees, including a significant portion offshore.

Sydney Airport generates income from its monopoly asset and increasing international passengers deliver much of its growth.

Hospitals and health care are essential services too and Ramsay and Sonic are amongst the largest providers of their particular services in Australia. People still need high quality health care even during a recession.

And finally, but by no means least, Reece and Reliance Worldwide provide plumbing products and services. Reliance Worldwide is only a recent ASX listing, but Reece performed admirably during the GFC in 2009, with net profit only dipping slightly before resuming its long-term upward trend.

Foolish takeaway

With the big four banks failing to grow earnings in recent times, now is the time to consider diversifying your portfolio or SMSF further. Adding some of the defensive stocks listed above would certainly help during a downturn too.

It might also be time to consider which shares to sell

After a double-digit rally for the ASX since 2016 lows, investors should be on high alert. You'll find a full rundown below of 3 shares we think you should avoid today plus one top pick worth buying, even if the market turns south and the RBA keeps rates at an "emergency low." Simply click here to uncover these stocks, no credit card required.

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Motley Fool contributor Mike King owns shares of Sydney Airport Holdings Limited, Telstra Limited, TPG Telecom Limited, Wesfarmers Limited, and Woolworths Limited. You can follow Mike on Twitter @TMFKinga

The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.