Investing in stock markets? Here's how to shield your portfolio from a crash

Indian stock markets have been witnessing a relentless bull rally since March 2020, so much that the market capitalisation of listed companies has risen by more than Rs 100 lakh crore aided by the gush of liquidity made available by central banks, rebound in corporate earnings, rapid vaccinations, lower Covid case count and the hopes of a faster economic recovery. However, many stock market analysts have been speaking of the need to be cautious as the valuations appear expensive and the market cap-to-GDP has also shot up to record highs leading to fears of a correction.

Equity experts have always maintained that investors must at any given point be prepared for a 5-10% correction in portfolios. Here’s how you can prepare yourself for a market crash and by following certain steps you can shield a bulk of your investments.

To begin with, one must know that short term direction of stock markets is impossible to predict and therefore experts say that it is crucial to stay invested at all times with a long term view. For instance, if an investor would have booked losses in March 2020 crash, fearing the worst would have been left high and dry in a month or two. Instead of those who invested extra cash in markets at that level are sitting on handsome profits.

Don’t time the markets

It is only by staying invested at all times, that one can expect their portfolio to outperform through various sub-segments of the market cycle. Be consistent and disciplined in your investments in equities in all markets up and down cycles.

Have a balanced portfolio

A well-diversified portfolio which is balanced across cyclical and non-cyclical sectors ensures that alpha does not get easily overwhelmed by non-stock-specific risk factors.

Diversification

Diversifying your portfolio is the most important measure that you must take to protect your investments. One can achieve this by not putting all your eggs in one basket, one must ensure the investments are divided as per the risk appetite in equities, debt, fixed income, gold or even real estate. The division will give you an investment hedge and protect your capital.

Have an emergency fund

This could be a great defence against a market crash. Investors must have a healthy emergency fund with surplus cash which can protect you from having to sell investments at a loss should you lose job or face a pay cut or encounter an unexpected expense after the market tanks. Ideally, investors must have enough cash to cover six months’ worth of expenses ready to use in emergencies.

Don’t be overleveraged

First up, never invest in stock markets with borrowed money. Once you make profits, your first priority should be to pay off any debt you may have. This is especially useful if you have a lot of high-interest debt such as credit card balances or personal loans which attract higher interest.