How to protect your ASX portfolio in a downturn

Here's one way you could future-proof your investment portfolio.

| More on:

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Key points
  • To protect portfolios during market downturns, smart investors diversify across sectors and geographies, reducing concentration risks.
  • Focusing on dividend-paying stocks can provide stable income during downturns, offering reinvestment opportunities; examples include Telstra and APA Group.
  • Maintaining a long-term perspective helps investors view short-term downturns as buying opportunities, aligning with the historical average ASX returns of 9% to 10% annually.

It has been a strong few years for the ASX, but as every investor knows, markets don't move in a straight line. Volatility and downturns are inevitable.

The good news is that with the right approach, you can ride out the tough times and still grow your wealth in the long run.

Here are some ways smart investors protect their portfolios when markets turn south.

A financial expert or broker looks worried as he checks out a graph showing market volatility.

Image source: Getty Images

Diversify across sectors and geographies

One of the biggest risks investors face is concentration. Holding too much in a single stock or sector leaves your portfolio vulnerable if that part of the market struggles.

For example, if your portfolio is tech-heavy, then a downturn in the tech sector could hold your portfolio back.

A mix of ASX blue chips, growth shares, and global shares can smooth returns.

Exchange traded funds (ETFs) make this easy. For example, the Vanguard Australian Shares Index ETF (ASX: VAS) gives exposure to the top 300 local shares, while the iShares S&P 500 ETF (ASX: IVV) provides instant access to the U.S. market. Combining the two gives you balance across economies.

Keep an eye on dividends

During downturns, share prices may fall, but dividends can keep paying. Income streams from reliable shares can provide stability and even reinvestment opportunities at lower prices.

Stocks like Telstra Group Ltd (ASX: TLS) and APA Group (ASX: APA) are examples of businesses that continue to generate cash flows and support shareholder payouts even in weaker markets. Adding a few dependable and defensive dividend payers can help cushion volatility.

Maintain a long-term perspective

It is tempting to react to every market wobble, but history shows that patience is often rewarded. Over the long run, the ASX has delivered average annual returns of around 9% to 10%, despite multiple recessions and financial crises along the way.

Warren Buffett famously said: "The stock market is designed to transfer money from the active to the patient."

By keeping your focus on the long-term growth of quality ASX shares and ETFs, short-term downturns become opportunities rather than threats.

Foolish takeaway

Market downturns are part of the investing journey, not the end of it. By diversifying your holdings, owning defensive stocks, and keeping a long-term perspective, you can protect your portfolio while positioning yourself for the recovery that inevitably follows.

Rather than fearing the next downturn, use it as a chance to reinforce your strategy — and perhaps even pick up quality ASX shares at better prices.

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended iShares S&P 500 ETF. The Motley Fool Australia has positions in and has recommended Apa Group and Telstra Group. The Motley Fool Australia has recommended iShares S&P 500 ETF. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

More on How to invest

A head shot of legendary investor Warren Buffett speaking into a microphone at an event.
How to invest

How to build a Warren Buffett-inspired ASX share portfolio

Investing like the Oracle of Omaha isn't as complicated as you might think.

Read more »

Beautiful holiday photo showing two deck chairs close-up with people sitting in them enjoying the bright blue ocean and island view while sipping champagne.
How to invest

How to build massive wealth with ASX shares

The share market could be the place to be if you want to become rich.

Read more »

Happy man holding Australian dollar notes, representing dividends.
How to invest

How to build a $100,000 ASX share portfolio

Wanting to build your portfolio? Here is one way to do it.

Read more »

A female sharemarket analyst with red hair and wearing glasses looks at her computer screen watching share price movements.
How to invest

How I would build the ultimate beginner portfolio with $10,000

A strong beginner portfolio often starts with diversification and a focus on quality.

Read more »

Two male ASX investors and executives wearing dark coloured suits sit at a table holding their mobile phones discussing the highest trading ASX 200 shares today
How to invest

How to invest $300 a month in Australian shares to target a $50,000 annual second income

The share market is a great place for investors to build a second income.

Read more »

Two boys looking at each other while standing by the start line with two schoolgirls.
How to invest

Just starting out? These 5 ASX shares could be the perfect first buy

Established, resilient, and a diversified starting point for new investors.

Read more »

A financial expert or broker looks worried as he checks out a graph showing market volatility.
How to invest

How to build a resilient ASX portfolio that can handle any market

Worried about market volatility? Here’s an easy way to handle it.

Read more »

A man stares out of an office window onto a landscape of high rise office buildings in an urban landscape.
How to invest

How to build a winning 10 ASX share portfolio from scratch in 2026

Here's why this group of shares could form a winning portfolio for Aussie investors.

Read more »