How worried should you be about a bear market crash?

Credit: Simon Cunningham

What: With the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) failing to hold on to its morning gains on Tuesday, the view that the market could be in the midst of a serious correction appears to be building amongst some investors.

Two recent articles published in the Australian Financial Review (AFR) highlight this point.

Firstly, Kerr Neilson, the founder of Platinum Asset Management Limited (ASX: PTM) shined a light on the United States share market suggesting that US share prices are elevated and a potential risk to investors. Mr Neilson has put his fund’s money where his mouth is too – he’s shorting US stocks.

Interestingly, despite China’s share market being at the epicentre of current volatility, Mr Neilson remains positive on the outlook for Asian stocks with a view that share prices are undemanding in the region.

Secondly, the AFR has run a story titled “RBS tells investors: Sell everything”. The title pretty much sums up the view of UK-based analysts at Royal Bank of Scotland (RBS). The bank’s credit team reportedly has said that markets are flashing the same stress alerts as they did before the onslaught of the Global Financial Crisis in 2008.

This scenario has led the RBS team to warn investors to “sell everything except high quality bonds.”

So What: Identifying a market commentator who can time the market and predict crashes accurately is arguably impossible. However, the current warnings and other macro-economic factors such as the diving oil price would appear to make it a very good time for investors to consider the quality of their portfolio, their defensive stock positioning and whether they hold their ideal level of cash given the opportunities which lower share prices may afford them.

Now What: One way to tread the fine line between getting caught fully invested in a bear market and having the capability to acquire beaten-up stocks is to own shares in companies which are positioned to benefit from a crisis.

One listed investment company which is currently “sitting pretty” is WAM Capital Limited (ASX: WAM) which is holding around 30% of its portfolio in cash.

Another company in a strong position is Flight Centre Travel Group Ltd (ASX: FLT) which boasted a net cash position of $532 million at 30 June 2015.

Motley Fool Pro is now open to new members

Our most comprehensive and innovative ASX investment service -- has reopened for a brief time, to accept new members. That means you've got the chance to follow along as one top investor puts $1,000,000 of The Motley Fool's own money to work...all in ASX stocks. But to get YOUR front-row seat, you must act NOW. (Please note: just 1,000 new member seats are available.)Click here to claim YOUR invite!

Motley Fool contributor Tim McArthur has no position in any stocks mentioned. Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. 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.

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss a very important event! Chief Investment Advisor Scott Phillips and his team at Motley Fool Share Advisor are about to reveal their latest official stock recommendation. The premium “buy alert” will be unveiled to members and you can be among the first to act on the tip.

Don’t let this opportunity pass you by – this is your chance to get in early!

Simply enter your email now to find out how you can get instant access.

By clicking this button, you agree to our Terms of Service and Privacy Policy. We will use your email address only to keep you informed about updates to our website and about other products and services we think might interest you. You can unsubscribe from Take Stock at anytime. Please refer to our Financial Services Guide (FSG) for more information.