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How To Defend Your Portfolio From A Down Market

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How To Defend Your Portfolio From A Down Market

The recent market turbulence has many traders wondering if the end of the six-year bull market is imminent. A growing number of investors are bracing for the worst in coming months by looking to go on the defensive.

But going defensive doesn’t necessarily mean selling everything you own and switching to an all-cash portfolio. Here’s a peak at things to look for when selecting the best defensive stocks to own during a market downturn.

1. Blue Chips

First, look for large companies with long-term track records of success and strong positions within their market segment. Though they may last for years, market downturns are only temporary. However, many smaller, marginal companies might go out of business if things get bad, and investing in blue chip companies reduces exposure to that risk.

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2. Dividends

In uncertain times, certainty can be a godsend. Who knows what type of returns you can get on stocks when the market is in a freefall, but dividends from solid companies are nearly guaranteed. Make sure the company has a long-term track record of maintaining or boosting dividends and has a reasonable payout ratio.

3. Low Beta

Beta, a measure of how much a stock moves relative to the overall market, is a trader's best friend when the market is rising, but it can be his or her worst nightmare during a market crash. Look for stocks with a beta below 1.0, the lower the better.

4. Value

Finally, high-growth investors tend to come flocking back to the safety of value stocks during downturns. Value provides a degree of support and protection, limiting the downside during a market crash. Look for stocks with a relatively low price-to-earnings (P/E) ratio relative to the overall market and relative to sector peers.

Stocks To Consider

There are countless companies out there that meet these criteria, but here’s a short list of several examples. Each of these five stocks has a market cap greater than $25 billion, a dividend yield greater than 3.0 percent, a payout ratio below 50 percent, a P/E and forward P/E less than 15.0 and a beta below 1.0.

  • Wal-Mart Stores, Inc. (NYSE: WMT)
  • International Business Machines Corp. (NYSE: IBM)
  • Intel Corporation (NASDAQ: INTC)
  • Reynolds American, Inc. (NYSE: RAI)
  • Exelon Corporation (NYSE: EXC)

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