8 ways to protect your Aussie share portfolio from a world war

Credit: Naval Surface Warriors

The S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) and ALL ORDINARIES (Index: ^AXAO) (ASX: XAO) would be sold off in a world war — that’s a no-brainer. 

Note: this article is written tongue in cheek (read: Motley Fool). 

News Flash: Now Focusing on the Good Stuff

If you flick on the news, it’s all terrible stuff.

Trump this.

Kim Jong that.

Navy ships here.

Assad there.


You name it, give the media four seconds of your time and they’ll fill it with fear.

As a human being, it’s tough when they play on your emotions.

But if that wasn’t bad enough, as an investor, we question ourselves: What can I do to secure my family’s financial future? Is this the end? Why does Trump breath so loudly? 

The good

With all the bad news thrust in front of us — admittedly, some of it needs to air in the media to ensure our world moves forward on a positive foot — it can be tough to sit back and consider what’s gone before us…

The cold war, Vietnam war, Iraq, Arab Spring, OJ Simpson, 87 crisis, Asian financial crisis, Dotcom bust, 9/11, Global Financial Crisis, Channel 10’s The Shire and countless seasons of The Bachelor

But despite these bad things, how has the market fared?

Dow Jones from 1977

Dow Jones Industrial Average

Source: Google Finance

Pretty good. Actually, really good.

Going back a little further, Vanguard reminds us that Australian shares — using the S&P/ASX 300 (Index: ^AXKO) (ASX: XKO) — have returned an average of 9.8% per year since 1970. US shares, meanwhile, are up an average of 11.3% — that turns $10,000 into $1.5 million. Hmmmm…. maybe it’s not so bad after all.

My point is bad things have and will happen, unfortunately. 

8 ways to protect your Aussie share portfolio

If, like others, you are a bit nervous, here is a list of 8 strategies you could use to protect your portfolio — some are sillier than others, but they all hope to achieve the same thing.

  • Shotgun shells and baked beans. Sell the house, grab the kids, get a gun licence (or not?) and head for the hills. Note: I don’t recommend this approach.
  • Diversify. You can easily get your money outside Australia by investing abroad (e.g. in European or US shares). That could help you mitigate a largely isolated event.
  • Build a cash buffer. I suggest investing in shares only after you have a cash buffer for emergencies. If you can afford it, six months of living expenses (rent/mortgage payments, utilities and food) is a good buffer.
  • Currencies. There is nothing stopping you (other than your better judgement, perhaps) from heading down to the currency exchange and buying US dollars, Swiss Francs or Euros. You won’t get a return on your holding unless the exchange rate moves in your favour.
  • Commodities. Some finance pundits (that’s fancy for ‘experts’) think commodities like gold are a store of wealth. Meaning, gold has been around for centuries and will be valuable even in a war. That’s why gold prices rise in times of uncertainty. It’s true to an extent. But aside from that, gold itself doesn’t pay interest, dividends… or the electricity bill.
  • Use options. Options are a finance contract that can be strategically used to limit your downside (or upside). For example, you could buy put options in a share account, which allows you to sell your shares to another investor at a price agreed on today. If the price drops below that level, you can sell your shares at a higher price. 
  • Shorting. Shorting is a method of betting on a falling price. I recently wrote this article on the topic. You could, for example, sell short shares of Commonwealth Bank of Australia (ASX: CBA) and if its share price falls you stand to benefit.
  • Other. There are managed funds, which you can buy into, that are designed to do the opposite of the market. The BetaShares Australian Equities Bear Hedge Fund (ASX: BEAR) and BetaShares Australian Equities Strong Bear Hedge Fund (ASX: BBOZ) invests in futures (queue the creepy alien music). But rather than be some space-age strategy, a future is just like an option – it’s a finance contract designed to limit your downside or increase your return.

Foolish Takeaway

Unfortunately, bad things happen and the media will be sure to find it. You can take the first approach and go live in the hills. But as investors, we are fundamentally optimistic about the future of the economy, world and humankind. Otherwise, we wouldn’t risk our money.

With a bit of prudence and skill, we can look forward to better and brighter financial future, in my opinion.

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Motley Fool Contributor Owen Raszkiewicz does not have a financial interest in any company mentioned. Owen welcomes and encourages your feedback. You can follow him on Twitter @OwenRask.

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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