How to protect your portfolio from the coming market crash

Credit: Motley Fool Ltd. All rights reserved.

Investing legend Warren Buffett, has often highlighted the benefits of sitting on a large pile of cash.

Buffett, via his company Berkshire Hathaway, often holds billions in cash simply to provide the optionality of seizing opportunities when they present themselves.

Monday’s nasty fall in the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) appears to have been short lived, with the index rebounding on Tuesday. While there is no telling whether a market crash is imminent or not, history suggests that sooner or later there will be a major correction.

Downside risks for the ASX appear to be on the mind of some of Australia’s top investors

The most recent investment update from WAM Capital Limited (ASX: WAM) reports that the manager increased fixed interest and cash holdings within the portfolio from 26% to 32% between July and August.

Meanwhile, Magellan Financial Group Ltd’s (ASX: MFG) flagship Global Fund is holding 16% of its $8 billion portfolio in cash.

Platinum Asset Management Limited (ASX: PTM) has also been increasing cash weightings. Its $10.5 billion flagship International Fund elevated its net cash position to 19.4% from 17.5% month on month.

When the market gets overheated, smart investors hold more cash

Warren Buffett famously returned cash to his partners in the late 1960’s when he became concerned that he could no longer find bargain stocks in an overpriced market.

While Australian fund managers might not be at that point, based on cash weightings, there would appear to be increased nervousness about the lack of value and risks in the global economy.

Here are 3 reasons why now could be the time to increase your cash position

  • The US Federal Reserve is expected to begin raising rates later this year and this event needs to be factored into your future outlook for economies and stock markets around the globe. Many believe that quantitative easing has artificially raised the price of equities and worry that a rate rise could unravel this artificial status quo.
  • August reporting season was uninspiring with many companies hesitant on providing guidance for the current financial year.
  • While Brexit was unsettling, the market has already fully recovered from those jitters which means it has been quite some time since the market really let off some steam. It’s rare for the market to continually move up without consolidating. The longer this bull market continues, the greater the chance that a better buying opportunity will be just around the corner.

While timing the market is difficult and some investors reasonably argue that you shouldn’t even bother trying, having some cash to deploy when the share market falls can be very rewarding.

Just how much cash to hold is up to the individual, however, following the lead of other top investors – like the three outlined above – could be a sensible approach.

How 1 Man Made 100x His Money After 50

Avoiding the losers is just as important as picking winning stocks! Few know, that as Warren Buffett blew out the candles on his 50th birthday cake, he had just 1% of his current fortune. Think about it: At an age when most give up hope, Buffett was just getting started on the remaining 99% of his fortune. Goes to show you that it's never too late for you to potentially get rich. Which is why we've gathered the strategies we learned from Buffett, distilled them down to 11 simple lessons, and put it in an exclusive report for you to claim. Just click here to learn more about this handy investing guide.

Motley Fool contributor Tim McArthur has no position in any stocks mentioned. 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.