If you're worried the foreseeable future could be rough on stocks, you're not alone. Members of both of the country's major political parties are fairly confident "the other guy" will prove problematic for the economy if he is elected president of the United States. Plus, a resurgence of the coronavirus pandemic led to record-breaking levels of new cases last month. Another round of pandemic-related shutdowns may be ahead, and it's not clear if the fragile U.S. economy can handle it.
If you're more convinced than not that action has to be taken sooner than later with your investment portfolio to account for these uncertainties, here are five common-sense moves you can make right now to shield your portfolio from a potential implosion.
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1. Shed your weakest, most speculative holdings
Investors have a tendency think -- and act -- a little more aggressively the longer a rally lasts, leading them to make bets they might not make early on in an expansion period. DraftKings (DKNG -2.43%) wasn't on many investors' radars, for instance, at the end of last year. But, with shutdowns forcing millions of people to stay at home and find new sources of entertainment, the sports betting platform has been all the rage despite its lack of profitability and sky-high valuation of nearly 40 times its trailing revenue.
Hype and gains may have prompted traders to look past those details at the time, but a crash sparked by an actual economic contraction could cause these bettors to tighten their purse strings.
2. Beef up exposure all-weather stocks
While costly hobbies like sports betting may be the first to suffer should the market environment turn ugly, there are some consumer goods -- like food and personal hygiene supplies -- most people won't stop purchasing. That bodes well for brands like Procter & Gamble (PG 0.08%) and Clorox (CLX -0.48%). The former is the name behind Pampers diapers, Tide detergent, and Gillette razors. The latter is of course the supplier of (among other things) a popular brand of bleach.
Note that all stock sell-offs have the potential to drag down all names, particularly when they first get going. Investors' worries are wide-sweeping when the initial shock of a correction sets in, and the selling can be indiscriminate. Eventually, though, the market starts to sort out the names that are truly impacted and the ones that are better defended from potential economic woes.
3. Buy some (cheap) put options
If you're not versed in equity or index options, now's not the time to start figuring them out. In simplest terms, a call option is a bet on price appreciation, while a put option is a bet on falling prices for a stock or index. There are nuances to puts and calls, however, that can make them tricky to trade. (There's also the not-so-small fact that your broker must approve you for options trading, which can take time.)
If you've worked with options before, however, this might be the time to step into some puts -- the cheaper, the better.
Why lower-cost options? The obvious answer is that right now, they cost less, which means you can commit less capital to such a trade. In this case, though, you also want cheap put options because this position will only serve as a sort of insurance policy you don't actually want to use. The purpose in this situation is only to shield yourself from a major setback for a finite period of time. If you buy them and are them unable to exercise them because the market never crashes, that's not necessarily a bad thing.
Tip: Don't try and hedge an entire portfolio from a market crash just using options. Just curbing some of the impact of a steep sell-off is still a win.
4. Go for the gold
Gold and other precious metals should be a part of most diversified portfolios, as these commodities are not correlated well with equities. Basically, when stocks are underperforming, there's a good chance other investments like gold are outperforming. Ditto for bonds.
This inverse relationship isn't etched in stone, for the record. The SPDR Gold Trust (GLD -0.27%) fell with the S&P 500 (^GSPC 0.11%) in late February and early March when the pandemic first took hold. The two recovered in tandem beginning with March's reversal as well. That's more of an exception to the norm than the norm itself, though. The reverse correlation is at least reliable enough to make gold a decent hedge if a crash is inevitable from here.
5. Take a breath, and keep it in perspective
Finally, bear in mind that just because the financial media has led you to believe a market meltdown is brewing doesn't necessarily make it so. As the old cliche goes, fear sells. A correction may be more muted and not qualify as a "crash," or it may not transpire at all.
And even if a correction does take shape, it may not matter for very long. As Nobel Prize-winning economist Paul Samuelson put it all the way back in 1966, "declines in U.S. stock prices had correctly predicted nine of the last five American recessions." In other words, there's a good chance any near-term crash will be short-lived, as the economy won't correspondingly implode with it. It's entirely possible doing nothing and riding out the volatility is prudent, too.
