This year established stock markets have continued to soar to new record highs or thereabouts – stretching valuations as they tick higher.
But history teaches us that bull runs never last forever and eventually markets will plunge into a bear territory, or even worse face a full-on crash.
When exactly this will happen is anyone’s guess, so unless you have a fully functioning crystal ball, having a contingency plan is good practice.
This Plan B is the thing that will support you when it feels as if the bad days just won’t stop coming. Here, we explore how you can shield your portfolio against devastating financial losses.
Before triggering your plan B, you need to be clear on whether their portfolio is doing badly because markets are down, or because you have picked poor investments
A solid plan A is a good plan B
For Ben Kumar, investment manager at Seven Investment Management, having a range of funds investing across different asset classes in the portfolios he manages means he is hedged against market downturns.
He said the results of numerous stress tests on the portfolios run by the wealth manager revealed that should the FTSE 100 fall by between 15 and 20 per cent, they would only capture between 4 and 8 per cent of the downturn – because of diversification.
To further shield his portfolios from adverse market conditions, Kumar said he has purchased put options – where an option to sell assets at an agreed price on or before a specified date – because they have been cheap to buy in recent history.
He said ‘You don’t need a plan B if your plan A is up to scratch.
‘If you are a long term investor, you do not need to worry about short term movements.
‘Sticking to your plans and not tinkering with your portfolio with ever movement in the markets is actually quite important.
‘The danger with having a hard trigger finger is markets are not efficient, so there are occasions where they will move violently one way then snap back. The reactions of the UK markets following the Brexit vote is a good example of this.
‘It is about knowing what your investment goals are, what your time horizon is and your appetite to risk. This should be at the forefront of any investor’s mind.’
How investors can protect against a market crash
It’s been a decent year for investors and major stock markets around the world are trading near record highs.
Things may continue to go up, but it always pays to have a Plan B just in case shares take a tumble.
Simon Lambert, of This is Money, explains how you can build a disaster plan into your portfolio.
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