Can I prepare my portfolio for a market crash

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Discover seven ways to bolster your portfolio in uncertain times – from holding a defensive core to maximising tax allowances

25 May 2023 | 3 minute read

Stock market volatility and ongoing geopolitical tensions have led some people to speculate about whether a market crash could be on the horizon.

While no-one can accurately predict the timing or intensity of the next stock market downturn, looking for ways to make your portfolio more resilient may help to ease your concerns.

   


 
     
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Here, we consider seven ways to help bolster your portfolio in these uncertain times.

Build a well-diversified portfolio

Having too great an exposure to one type of investment leaves you vulnerable to sudden swings in the market and changes in outlook. Spreading your money across a range of asset classes, including shares, bonds and cash, can help to reduce volatility in your portfolio.

As well as including different asset classes in your portfolio, you could also diversify by sector. Some sectors are more exposed to economic events than others. Covid, for example, hit a vast swathe of service sectors, came out of the blue and completely changed the outlook for these areas.

Other ways to diversify include investing across different geographical regions – it could be the case that developed markets underperform while emerging markets outperform (or vice versa).

Rebalance your portfolio

The asset mix in your portfolio should reflect your attitude to investment risk. If, however, one asset class performs better than the others, you could find that your portfolio’s risk level changes over time. If stocks return more than bonds, an asset allocation of, say, 60% stocks and 40% bonds could become more like 70% stocks and 30% bonds.

One way to return to the original risk level is to ‘rebalance’ your portfolio. This involves adjusting the weightings of the asset classes in your portfolio by, for example, selling some stocks and reinvesting the proceeds into bonds. This can be complicated and so is generally best left to the experts.

One thing to be aware of when rebalancing a portfolio in a General Investment Account (GIA) is capital gains tax (CGT). You can make investment gains of up to £6,000 in the 2023/24 tax year without paying tax, and anything over this amount will be liable to CGT at up to 20%.

Another way to rebalance your portfolio is to direct any new cash contributions to the asset classes that have underperformed. This could be a good option if you have excess cash savings and / or have yet to use up your £20,000 annual ISA allowance.

Hold a defensive core

As a general rule of thumb, you should only opt for riskier assets if you have plenty of time before you’ll need the money. While government and corporate bonds do not necessarily get the pulse racing in investment terms, they play a valuable role in helping to soften the wild swings that we sometimes see in stock markets.

The proportion you hold will depend on your goals and attitude to investment risk, so make sure you seek advice on what is right for you.

Maintain a cash cushion

If you rely on your investments to fund your retirement or deliver an additional income stream, a stock market downturn can be especially alarming. One way to minimise shocks to your portfolio is to maintain a cash cushion.

Holding up to two years’ worth of essential expenditure in an easily accessible savings account means you aren’t entirely reliant on market performance to fund your lifestyle. It could also give your investment portfolio time to recover.

Make the most of your tax allowances

Making the most of your tax allowances could provide an immediate boost to the value of your portfolio. If, for example, you moved money from an ISA or GIA to a pension, this could instantly uplift its value by 20% because of the tax relief you receive on personal pension contributions. This could help to provide a cushion if a stock market downturn occurs.

You can get tax relief on pension contributions worth up to 100% of your UK relevant earnings or £60,000, whichever is lower, although this might be reduced if your ‘adjusted income’ exceeds £260,000. Even if you don’t pay income tax, if you’re under 75 you’ll still get 20% tax relief on the first £2,880 you pay into a pension each tax year.

Revisit your plans

Your plans may have changed since the last time your portfolio was reviewed. This is a good time to check whether your investments still suit your individual circumstances or if anything needs adjusting.

If, for example, you’re planning an earlier retirement than you originally intended, it may be wise to reduce the level of investment risk in your portfolio. And if you need to access your money in the next six to 12 months, consider taking action sooner rather than later – the stock market can sometimes move very quickly, so it helps to be prepared.

Avoid making hasty decisions

In uncertain times, it’s only natural to feel worried about the impact of wider economic events on your portfolio’s performance. However, making hasty decisions could cost you in the long run.

Getting some smart advice can help to alleviate any concerns you might have. A financial adviser will check your portfolio suits your individual circumstances and is robust enough to deliver performance over the long term.


The value of investments, and any income from them, can fall and you may get back less than you invested. This does not constitute tax or legal advice. Tax treatment depends on the individual circumstances of each client and may be subject to change in the future. Investment values may increase or decrease as a result of currency fluctuations. Information is provided only as an example and is not a recommendation to pursue a particular strategy.


   


 
     
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