Markets are getting jittery.
Overnight, the US markets tumbled, with the Dow Jones Industrial Average falling 0.8%, the broader S&P 500 dropped 1% and the tech-heavy NASDAQ lost 0.7%.
It's the second big fall in just a few days, and the Dow has now lost 3.1% since July 30. It seems investors fear the very real prospect of higher interest rates in the US, after a fresh batch of economic data showed the US Federal Reserve's quantitative easing program is coming to an end. Rate hikes could occur sooner, rather than later.
Geopolitical concerns also slapped Wall Street in the face. Reports that Russia is amassing troops on the border with Ukraine, and CNN reports Poland's foreign affairs minister said a Russian offensive was imminent.
The SPI Futures suggests the S&P/ASX 200 Index (Index: ^AXJO) (ASX: XJO) could fall by 31 points when trading opens this morning, and comes on the back of yesterday's 0.4% fall.
But Foolish investors should not read that as a sign to sell out.
There are some simple steps you can take to both protect your portfolio if a downturn occurs, as well as profit from it.
As we have written here and here, you might want to take some profits off the table and build up a cash buffer. That provides two advantages – protecting you from a fall, and giving you the optionality of picking up shares on the cheap.
Secondly, if you don't have dividend paying stocks, now might be the time to take a closer look at Insurance Australia Group Ltd (ASX: IAG), Telstra Corporation Ltd (ASX: TLS), Woolworths Limited (ASX: WOW) or Wesfarmers Limited (ASX: WES). Listed investment companies like Australian Foundation Investment Company Limited (ASX: AFI) and Milton Corporation Limited (ASX: MLT) with their diversified portfolios could also be good candidates.
