How can I protect my stock portfolio against market crashes?

To protect your stock portfolio against market crashes, focus on diversification, stop-loss strategies, defensive stocks, and holding cash reserves. Staying patient and investing in stable assets can help you minimize losses and take advantage of market recoveries.

1. Diversify Your Investments

Diversification helps reduce risk by spreading investments across different sectors and asset classes.

• Invest in multiple sectors: Avoid overexposure to a single industry.
• Include defensive stocks: Companies in healthcare, utilities, and consumer staples perform well during downturns.
• Balance with gold and bonds: These assets provide stability when stock markets decline.

2. Use Stop-Loss Orders

A stop-loss order automatically sells a stock when its price falls to a certain level, preventing further losses.

• Trailing stop-loss: Adjusts as stock prices rise, locking in profits.
• Fixed stop-loss: Helps set predefined exit points.
• Volatility-based stop-loss: Adjusts to market fluctuations.

3. Keep Cash Reserves

Holding cash reserves allows you to buy quality stocks at lower prices during a market crash.

• Emergency fund: Maintain 6-12 months’ worth of expenses.
• Opportunity fund: Set aside cash to invest in undervalued stocks.
• Avoid panic selling: Having cash helps you stay patient.

4. Invest in Defensive Stocks

Defensive stocks tend to remain stable even during market downturns.

• Healthcare: Demand for medicines and treatments remains constant.
• Utilities: People always need electricity, water, and gas.
• Consumer staples: Essential goods like food and hygiene products sell regardless of market conditions.

5. Stay Focused on Long-Term Goals

Stock market crashes are temporary, and markets recover over time.

• Avoid panic selling: Stay focused on long-term goals.
• Invest in strong companies: Quality stocks rebound faster.
• Rebalance your portfolio: Adjust allocations as needed.