Although the S&P/ASX 200 Index (ASX: XJO) has now enjoyed 4 weeks of positive momentum, the week we're having right now is starting to look a little different. Monday saw a 2.5% fall, which was backed up by another 2.5% drop yesterday.
If this trend continues for the rest of the week, we could be looking at a significant shift in market sentiment and the valuation of ASX shares. And if that happened, we might well see a 'double-dip'-style bear market once again.
Now, I'm not saying this will happen and indeed I hope it doesn't. But the coronavirus situation remains fluid and we are far from being out of the woods yet. Thus, I think it would be wise for ASX investors to adopt an 'anything can happen' attitude in these uncertain times. As the saying goes 'hope for the best, plan for the worst'.
So how would one prepare for such a situation?
Well, I think there are 3 ways you can hedge your bets for today's stock market.
Prioritise strength over growth
It can often be tempting to chase ASX growth shares in a time of rising market sentiment. Growth shares, by definition, tend to outperform the broader ASX 200 in good times, making them great stocks to hold in a bull market.
Unfortunately, growth shares also tend to underperform in bear markets. Investors tend to drop companies with high debt and low earnings the hardest when fear comes knocking on the market's door.
So in these uncertain times, it might be risk-reducing to stick with the more mature, established dividend-paying blue-chips on the ASX than chase the high-flyers.
Now, just because a company is a mature blue-chip doesn't mean its share price won't be subject to volatility. It just means that its earnings base might be more resilient.
Build a cash position
Cash is the ultimate safe-haven asset class, at least in the short term. Not only will a large cash position insulate your ASX portfolio from a market crash, but it also gives you the opportunity to pick up shares on the cheap if fear does return to the markets.
Although cash is a lousy investment over the long-term (ASX shares are far superior), it can be a useful way to store value if you're looking for an easy way to add some protection to your portfolio and give you some dry powder for any future market wobbles.
It's a strategy that Warren Buffett loves, which I think makes it well worth emulating!
Foolish takeaway
Investing in shares can be both an exhilarating and harrowing experience – and we have certainly seen more of the latter in recent months. But if you're really worried about the ASX 'double-dipping' into another bear market in the coming weeks and months, I hope the tips above prove helpful in helping you plan for the worst.
