Insulating Your Portfolio from Inevitable Market Corrections

Posted on
Insulating Your Portfolio from Market Corrections

Naturally, investors get uneasy during times of volatility, but rather than see it as something to worry about investors should view volatility as an opportunity to pick up more shares at bargain prices. After most market corrections, clients typically ask how they can construct their portfolio to insulate from dramatic price movement. So here are a few recommendations if you find yourself wondering the same thing:

Consistent dividend-paying stock

The most powerful defence is a stock that has healthy earnings and a good dividend payout ratio and dividend yield, especially when compared to the return that is available on the risk-free treasury bond.

Here’s how it protects you during a down market: As the stock price falls, the dividend yield goes up because the cash dividend is a more significant percentage of the purchase price of each share.  In the midst of a market crash, at some point the dividend yield becomes so high that investors with excess liquidity often sweep into the market, buying up the shares and driving up the price. That’s why you typically see less damage to high dividend paying stocks during down markets.

Go Blue Chip

Seasoned investors are interested in one thing and one thing only: Buying companies with stable earnings at the most attractive price possible. In difficult economic times, the stability of profits is crucial. Often, the most successful stocks are those that have durable competitive advantages.

Identifying these companies isn’t hard. They are often referred to as blue-chip stocks; for example: Coca-Cola, Johnson & Johnson, National Commercial Bank Financial Group, Jamaica Producers  Group Limited, just to name a few. They often have extremely large market capitalisations.

Stocks Trading at Reasonable Valuations

Of course, diversifying your portfolio with stocks that traditionally have low price to earnings ratios, low price to book ratios, low price to sales ratios, and conservative balance sheets, the odds are good that you will emerge from the wreckage unscathed over the long-term.

This is why value-based money management have managed to return such impressive results to their investors for years. For investors lacking experience, this is best achieved through funds such as the Safe Solutions or Money Managers or Collective Investment Schemes.

A Few Other Thoughts

If you can’t analyse financial statements and calculate a conservative estimate of intrinsic value for the assets in your portfolio, it is a wise policy to maintain broad diversification.

Consider keeping a portion of your portfolio in international investments by investing in a highly rated, low-risk companies.

Never invest any capital in equities that you might need within the next five years.

If you can’t handle price volatility, consider reducing the overall gyrations of your portfolio by including a substantially fixed income component. Although this might lower your returns over subsequent decades, if it reduces the chances of you selling everything in a panic, it can provide a workable compromise.


If you liked this article and want to read other great stories, try our Archives. Also if you are new to investing you can try our Investment Basics Blog.

If you want to start investing with SSL but don’t have the time to monitor the market or to conduct the trades yourself then you can choose one of SSL’s managed Financial Planning products. We offer a variety of products for every type of investor and if you are interested in managing online trades yourself and having complete control over your investment portfolio then you can try SSL’s Brokerage account.

Follow us on Facebook, LinkedIn and Twitter please leave us a review.

Share it with a friend: