5 simple ways to protect your portfolio from a market correction

September has been one of the harshest months for investors in recent memory with the benchmark S&P/ASX 200 (INDEXASX: XJO) tumbling more than 5% since the beginning of the month. While there is no way of telling just how much further this market could fall, it is imperative that investors ensure they are prepared for the worst.

Although it’s extremely difficult to completely protect your portfolio without removing all your money from the market, here are five simple ways you can strengthen your position to soften the blow should the market tumble any further…

  1. Increase your cash balance. Although holding cash might not seem as ‘sexy’ as investing in growth stocks, it’s a good way to ensure that not all your wealth is exposed to the market’s wrath. In addition, it’s handy to have cash at the ready to buy stocks when they fall to bargain prices!
  2. Diversify between companies and industries. Investors shouldn’t diversify simply for the sake of diversifying, but they shouldn’t store all their eggs in one basket either. Ensure you maintain a good balance of companies with variance in size and industries to help limit the blow and spread the risk.
  3. Buy blue chips. You should always ensure you maintain a strong foundation for your portfolio, made up of strong companies. Right now, I believe Amcor Limited (ASX: AMC) and Insurance Australia Group Ltd (ASX: IAG) are great blue chips to buy.
  4. Buy “recession-proof” stocks. In addition, it’s also worth exposing yourself to growth stocks which are more likely to thrive during down times. As a perfect example, Veda Group Ltd (ASX: VED) grew revenues strongly through the GFC as companies recognised the importance of checking their potential customers’ credit histories before extending them credit. Cash Converters International Ltd (ASX: CCV) is another solid bet.
  5. Avoid checking the stock market. Often in times of economic uncertainty, the biggest threat to your wealth is YOU. Investors tend to panic more and sell impulsively when they constantly check the market’s movements. So as difficult as it can be, try not to check prices too often.

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Another way investors can protect their wealth is by investing in companies which offer strong, reliable dividends. The Motley Fool’s top analyst, Scott Phillips, has recently identified one stock which he believes offers outstanding growth potential as well as a 6.3% grossed up dividend yield which could help stabilise your portfolio.

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Motley Fool contributor Ryan Newman owns shares in Veda Group Ltd and Cash Converters International Ltd.

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