Top 10 Tips To Crash-proof Your Investments In Equities

Everybody know how to make money in a bull market. How about a bear market? It creates fear, panic, uncertainty and mistakes. You investment’s market value may fall 20% in a matter of days.

Bear markets can be a temporary phenomenon or a permanent one. In a temporary bear market you could lose 30% or more but they are likely to recover in the near term itself. But in a permanent bear market you could lose 30% or more and that never recovers for a longer period time.

Remember the Wall Street Crash of 1929? Dow Jones corrected almost 90% from its peak. And it didn’t recover those loses until 1954. So it took almost 25 years for the Dow Jones to hit a new high.

"Anyone who bought stocks in mid-1929 and held onto them saw most of his adult life pass by before getting back to even." – Richard Salsman

So how to save your self from a stock market crash? Here are the top 10 tips to crash-proof your investments.

1. Diversify among many stocks

It makes sense to diversify your investments stock wise and sector wise. If you want to enter IT stocks then don’t just put all your money in one basket.

2. Diversify across many sectors

Remember there are stocks which are hitting new highs even in a bear market.

3. Spread your portfolio among different asset classes

Spread your portfolio by investing in different asset classes like Equities, Mutual Funds, Insurance, Gold, Commodity only to name a few. Every asset class has a long-term history of success. They have made money despite plenty of temporary losses.

4. Spread your investments geographically

Sometimes it makes sense to invest in International Index Funds.

5. Don’t forget fixed income or fixed deposits

Even with all this diversification, you still need some fixed-income investments such as fixed deposits which offers guaranteed returns of say 6% to 10.5%. Don’t expose your entire portfolio to the stock market.

6. Consider a mechanical defensive strategy to limit losses

Active risk management isn’t for everyone, but it is possible to follow systems that let you invest in an asset when its price is rising and switch to cash when its price is falling, without your having to make any forecasts. Every day that your money is in cash is a day you’re not exposed to a possible bear market. Don’t do this without a firm discipline. You’re asking for big trouble if you base your moves on your emotions or your own judgments about the market.

7. Avoid paying unnecessary expenses

If you neglect this, you can lose a lot of money and have no way to gain it back. In fact, you can lose more than you invest in the first place.

8. Avoid paying unnecessary taxes

In an actively managed fund, the fund manager decides when to sell and incur capital gains liability that will impact your tax bill. Choose funds in which the management pays attention to limiting your tax liability. Avoid funds that churn their portfolios, buying shares for short-term gains that can hurt you at tax time.

9. Don’t panic

Selling an investment after it’s taken a big hit can leave you with a permanent loss. If it rebounds, which it probably will, you won’t be there to benefit.

10. You can’t outwit the bear by avoiding all risk

One of the worst bears in the forest is inflation, and it can be especially painful for the most risk-averse investors. If you want to hang onto cash in an environment of 3% inflation, you are almost certain to lose purchasing power over the long run.

Source: Yahoo! Finance

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