3 simple ways to protect your portfolio from a market crash

Having your money in the share market during a market crash is never fun, but there are a number of simple strategies investors can use to help them through to better times.

Keep some cash handy

Investors should always have a portion of their portfolio allocated to cash to act as a buffer when times get tough. I like to keep a minimum of 5%-10% of my portfolio in cash at any given time as this gives me the opportunity to buy my favourite shares when they get hammered during a market wide sell-off.

Interestingly, some of the best known fund managers, including those at WAM Capital Limited (ASX: WAM), have around 30% of their assets weighted to cash right now. This should provide investors with an idea of how professional investors are viewing the market currently in regards to value.

Buy some insurance

No, I don’t mean buying insurance with QBE Insurance Group Ltd (ASX: QBE), but rather through the use of specific exposures that can limit your downside risk should a market crash occur.

Although this strategy was once only available to professional investors through the use of derivatives, retail investors now have the same opportunity to protect their portfolios from a market crash through the use of ‘short’ exchange traded funds (ETFs) such as the BetaShares Australian Equities Stronge Bear Hedge Fund (ASX: BBOZ).

Although there is a 1.19%p.a. management fee with this ETF, it is useful for investors who think the market is due for a correction, but don’t necessarily want to sell their shares. In this case, a 1% fall in the market will be expected to deliver a 2%-2.75% gain in the value of the ETF (and vice versa).

The obvious flip-side to this strategy is that investors will forgo any upside should the market continue to trade higher.

Invest in low volatility shares

The idea behind this strategy is that low volatility, or low ‘beta’, shares will fall less than the broader market should a market crash occur. Typical shares that fall into this category include utilities, infrastructure and defensive healthcare companies, with Telstra Corporation Ltd (ASX: TLS) being the classic example.

Investors should note, however, that many of the low volatility, high yielding shares that have performed so well over the past few years, are the ones that are likely to come under the most pressure should a market crash occur on fears of rising interest rates.

In this case, investors can lower the volatility of their portfolios by investing in diversified investment companies such as Washington H. Soul Pattinson and Co. Ltd (ASX: SOL) and Milton Corporation Limited (ASX: MLT).

Foolish takeaway

Market crashes are an inevitable part of investing in the share market, but investors can protect themselves by implementing a few simple strategies.

After a double-digit rally for the ASX since 2016 lows, investors should be on high alert for a market crash.

Click here to to find a full rundown 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.

Motley Fool contributor Christopher Georges 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.

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