"Be greedy when others are fearful and be fearful when others are greedy"
This is probably billionaire investor Warren Buffett's most oft-quoted line, but I believe its timeless relevance is particularly pertinent today.
With the All Ordinaries (INDEXASX: XAO) index closing in on a new record-high, there is definitely reason to believe that "others are being greedy" at current times and this of course means we might want to start trembling in our boots (at least a little). Bull markets do tend to die on euphoria, and things are looking pretty happy at the moment.
No, I'm not suggesting we all go to cash and hide under the bed, but now may be a good time to start putting in some downside protections in our portfolio.
Here are three ways to hedge a portfolio against what history dictates will be an inevitable bear market.
1. Utilise bonds and fixed instruments in your portfolio
Traditionally, bonds and other debt instruments outperform stocks in a bear market. While you may not want to buy individual bonds yourself, an exchange-traded fund (ETF) like Vanguard Australian Fixed Interest ETF (ASX: VAF) is a good, easy choice. Although interest rates are relatively low at this point, you still might want to consider having a small slice in bonds for some protection.
2. Invest in non-cyclical dividend payers
There are dividends, and then there are dividends. Although some of our biggest yielders over the past 12 months have been mining companies like BHP Group Ltd (ASX: BHP), resource companies tend to get punished during times of economic turmoil (as commodity prices don't perform well in bear markets) – meaning dividend will quickly dry up.
Consumer non-cyclical companies tend to be amongst the least-affected by tough times and, as such, provide earnings and income protection for your portfolio. Consider owning companies like Wesfarmers Ltd (ASX: WES) or Woolworths Group Ltd (ASX: WOW), which sell us everyday essentials. These dividend payers can help you sleep easier at night knowing their products will always be 'in vogue'.
3. Increase your cash or get exposure to gold
In a down market, cash is king and you want to have at least some lying around to take advantage of any big discounts that a bear market might provide. Additionally, you can get some exposure to gold, as gold tends to outperform other assets in tough times. The ETFS Physical Gold (ASX: GOLD) is an easy way to do this if you don't want to get yourself some bullion and a safe.
Foolish takeaway
With the markets experiencing some healthy exuberance at present, I believe it is time to think about what may lie around the corner. Good times never last forever, and those who are at least somewhat prepared will be thanking their past selves when the tide eventually turns.
