How can I reduce the risk of my stock portfolio during a market downturn?

You can reduce the risk of your stock portfolio during a market downturn by diversifying investments, allocating assets strategically, investing in defensive stocks, using stop-loss orders, and keeping cash reserves for opportunities.

Let’s explore the best ways to protect your investments and manage risk effectively during a stock market crash.

1. Diversify Across Asset Classes

Holding different types of investments reduces the impact of market volatility on your portfolio.

• Stocks & Bonds: Bonds provide stability when stocks decline.
• Gold & Commodities: Gold often rises during downturns.
• Real Estate: Less affected by short-term stock fluctuations.

A well-diversified portfolio minimizes losses during market crashes.

2. Focus on Defensive Stocks

Defensive stocks perform well even in economic downturns, reducing losses.

• FMCG Stocks: Companies like Hindustan Unilever and ITC sell essential products.
• Pharma Stocks: Demand for medicines remains strong in all conditions.
• Utility Stocks: Power and water companies provide stable returns.

Adding these stocks ensures stability in volatile markets.

3. Use Stop-Loss Orders

Stop-loss orders help limit your losses when stock prices fall rapidly.

• Fixed Stop-Loss: Set a percentage below the purchase price to sell automatically.
• Trailing Stop-Loss: Moves with the stock price, locking in gains.
• Time-Based Exit: Sell if a stock underperforms for a specific period.

Using stop-loss orders prevents huge losses during market crashes.

4. Keep Cash Reserves

Holding cash allows you to buy stocks at lower prices during downturns.

• Liquidity: Ensures you can seize opportunities quickly.
• Risk Reduction: Protects your portfolio from sudden losses.
• Better Entry Points: Buy quality stocks at discounted prices.

Maintaining cash reserves strengthens your financial position in volatile markets.