The 2020 stock market crash could cause investors to become increasingly concerned about their portfolio’s capacity to survive an uncertain economic outlook. After all, with many industries likely to suffer from reduced demand for their goods and services, it could prove to be an uncertain period for the stock market.

Through buying a diverse range of financially sound companies with defensive characteristics, you could protect your portfolio from a future market crash.

Diversification

Perhaps the simplest and most effective means of reducing your portfolio’s risks is diversification. Holding a larger number of companies reduces your reliance on a small number of businesses to generate capital growth or income, which is likely to make your portfolio returns more stable and consistent.

Furthermore, investing in multiple geographies and industries could reduce your overall risks. For example, the coronavirus pandemic is likely to affect some regions and sectors more than others. By having exposure to a wide range of countries and industries, you may be better able to protect your portfolio’s returns in the long run.

Fortunately, the cost of buying stocks has fallen significantly over recent years through the growth in online sharedealing. Therefore, diversification is cheaper and more accessible to a larger number of investors than it used to be.

Defensive stocks

Buying defensive stocks could limit your losses during a market crash. Defensive stocks are generally less impacted by an economic downturn than their cyclical peers. They may, for example, have business models that are relatively unreliant on the performance of the economy. This may allow them to deliver solid financial performances even during a recession or depression.

Examples of sectors where defensive stocks may be found include utilities, tobacco and healthcare. Although they may not necessarily offer capital growth during bull markets that can match that of cyclical businesses, they may continue to be relatively popular among investors during challenging market conditions. As such, their total returns in the long run could prove to be relatively impressive.

Financially-sound businesses

Another means of preparing for a market crash is to buy stocks that have solid financial positions. This may include companies that have modest debt levels, access to multiple sources of finance, as well as large cash balances. They may be able to withstand a period of lower sales or even losses better than their sector peers. This could make them attractive to investors, which may help to support their stock prices.

Through analysing company annual reports and investor updates, it is possible to build a relatively accurate picture of the financial strength of a business before buying it. Taking the time to understand its balance sheet strength could help you to avoid severe declines during a market crash, which could lead to higher returns from your portfolio over the long term.

More reading

• These were the worst performers on the ASX 200 last week
• Building a $100,000 portfolio with Afterpay shares and 3 other ASX companies
• ETFs I’d pick to build a passive portfolio
• Coronavirus: why I’d buy shares during this market volatility
• What ASX shares should you invest in during a bull market?

Motley Fool contributor Peter Stephens has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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How to invest passively

ETFs are a great way to build your wealth passively in my opinion. Also known as exchange-traded funds, ETFs are a great investment tool.

The idea of an ETF is that you can invest in dozens (or hundreds) of businesses or assets in a single investment. I think it’s much easier than buying all those shares yourself. Many of the best ETFs also come with cheap management fees.

But which ETFs are you meant to buy? Some people like the idea of Vanguard Diversified High Growth Index ETF (ASX: VDHG) because of the diversification offered. But I don’t think investing in bonds at this price makes sense and low yield makes sense.

I’d put together an ETF portfolio with these weightings:

BetaShares Australia 200 ETF (ASX: A200) – 30%

If you’re going to invest in ASX shares you may as well go for the cheapest option. BetaShares offers this one for an annual fee of just 0.07% per annum.

You get decent diversification with shares like CSL Limited (ASX: CSL), Commonwealth Bank of Australia (ASX: CBA), BHP Group Ltd (ASX: BHP), Macquarie Group Ltd (ASX: MQG) and Wesfarmers Ltd (ASX: WES).

One of the more attractive things about this ETF is the income benefits. Not only do ASX shares generally have generous dividend payout ratios, but those dividends also come with franking credits.

This option covers the Australian shares.

iShares S&P Global 100 ETF (ASX: IOO) – 40%

The biggest businesses in the world are steadily accumulating more market power and selling more services to the world.

Shares like Microsoft, Amazon, Apple, Facebook, Alphabet and so on are very compelling businesses today and their known projects like VR and automated cars are also exciting.

What I like most about this ETF is that it’s invested in the biggest global businesses, it doesn’t really matter which country they come from.

This ETF gives us the global blue chip exposure we need.

Betashares FTSE 100 ETF (ASX: F100) – 20%

The global share market doesn’t provide much income and I’m cautious about getting too much exposure to the US share market right now considering what might happen over the next months leading up to the election.

The UK share market could be one of the best ways to get international diversification whilst avoiding US shares.

Within this ETF are plenty of quality shares like Astrazeneca, GlaxoSmithKline, HSBC, Diageo, Unilever, Reckitt Benckiser, Vodafone, National Grid, the London Stock Exchange and so on.

As a bonus, at the end of April 2020, the underlying trailing dividend yield was almost 6%, although it’s obviously a bit lower now.

Vanguard FTSE Asia ex Japan Shares Index ETF (ASX: VAE) – 10%

Asia is a very interesting place to invest in shares. It’s home to some of the world’s biggest technology companies like Tencent, Alibaba, Taiwan Semiconductor Manufacturing and Samsung. But this ETF is actually invested in over 1,250 shares. I think that’s excellent diversification. 

The Asian middle class have been getting steadily richer over the years and this is giving them more spending power.

As the coronavirus pandemic subsides and/or an effective treatment is produced, the Asian region is likely to get back to the solid growth it was seeing before all of the restrictions.

The ETF has a decent dividend yield and attractive statistics like a return on equity (ROE) ratio of around 14.75%.

Foolish takeaway

All of these ETFs are quality options in my opinion. If I only had $1,000 to get started with today I’d go for the UK ETF because of its solid diversification, but with less exposure to the US than many other index options.

More reading

• What the 10 largest companies in the world have in common
• Ready to invest your first $2,000 in ASX shares? Do these 3 things first
• How to become a millionaire by investing in ASX shares
• I don’t normally buy ETFs, but I would buy these 2
• How to make $1,000 a month in dividends

Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of CSL Ltd. The Motley Fool Australia owns shares of and has recommended Macquarie Group Limited. The Motley Fool Australia owns shares of Wesfarmers Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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The market volatility caused by coronavirus could produce some of the best buying opportunities in many years for long-term investors in shares.

Certainly, there are potential risks ahead. The world economy faces one of its biggest-ever challenges, and may experience a prolonged period of disappointing growth.

However, many high-quality businesses are likely to survive such a period. Buying them now while they offer wide margins of safety and holding them for the long run could yield high returns.

Market volatility

The past performance of the stock market suggests that the best buying opportunities occur when market volatility is at its highest. During such periods, many investors become increasingly fearful about the prospects for their portfolios. This can mean that demand across the investment community for equities declines, thereby causing stock prices to fall.

Although in some cases investor caution towards the stock market is warranted, since some stocks may not survive an economic shock, the wider market has a strong track record of recovering from its downturns. Therefore, investors who can live with the potential for disappointing performance from their portfolios in the short run, while sentiment among their peers is weak, could benefit from long-term recoveries that boosts the performance of their portfolios.

High-quality stocks

As mentioned, not all companies survive recessions. Therefore, it is imperative that investors focus their capital on those businesses that have a high chance of survival. They are likely to include established businesses with long track records of delivering improving profitability in a wide range of operating conditions. They may also include companies with low debt levels, strong cash flow and wide economic moats that protect them from the potential for lower sales and profitability in the coming months.

Although such companies may trade at higher prices than their weaker peers, paying a premium for a high-quality stock could be a prudent move. It may substantially lower your overall risks, and still leave a large amount of capital growth potential over the long run.

Buy-and-hold

Buying ASX shares during the current period of high market volatility is just one part of successfully capitalising on lower valuations. To maximise your returns, holding stocks for a long time period may be necessary. It could take many years for the world economy to overcome its current challenges, and for the strongest businesses within a specific industry to extend their dominance over weaker peers.

Therefore, a buy-and-hold strategy could be a sound means of capitalising on current market volatility and the likely recovery potential of the stock market. It has historically been a successful strategy that has helped many investors to take advantage of uncertain market conditions. Although the world economy may be facing an unprecedented crisis, it could do likewise over the coming years and may lead to a significant improvement in your financial situation.

More reading

• What ASX shares should you invest in during a bull market?
• 3 simple investment rules I follow
• EML Payments and these ASX mid cap shares could be destined for big things
• What the 10 largest companies in the world have in common
• Why is it so hard to outperform the ASX 200 index?

Motley Fool contributor Peter Stephens has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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What ASX shares should you invest in during a bull market?

It’s a tough question because many shares have performed so strongly. The S&P/ASX 200 Index (ASX: XJO) has risen by 31.8% since 23 March 2020. That’s an amazing performance.

But where are we supposed to invest now with many shares now trading close to, or above, their pre-coronavirus highs?

The recovery of some shares has been incredible. The Afterpay Ltd (ASX: APT) share price is above $50. The ASX Ltd (ASX: ASX) share price almost reached $90. The Xero Limited (ASX: XRO) share price briefly went above $90 this week. The Kogan.com Ltd (ASX: KGN) share price is flying high.

The Australian economy continues to recover and we are in a much better position than Europe or the US. The ASX is justifiably on an upward trend. I’d be more concerned with the US share market than ours.

What ASX shares should we invest in?

I think we should take the same approach as we always do with shares. Is it good value today considering its prospects and the potential that things won’t work out perfectly?

Vanguard Australian Shares Index ETF (ASX: VAS) could be a decent option considering it’s still noticeably lower than before the coronavirus sell off.

There are some shares that I think still look good value considering the global uncertainty regarding the pandemic and the economic effects. I think stocks like Washington H. Soul Pattinson and Co. Ltd (ASX: SOL) and Brickworks Limited (ASX: BKW) could be great value. Businesses such as Bubs Australia Ltd (ASX: BUB) and Pushpay Holdings Ltd (ASX: PPH) could grow into big businesses.

I also like the idea of some top performing fund managers who are playing it more cautiously like MFF Capital Investments Ltd (ASX: MFF) and Magellan Global Trust (ASX: MGG).

More reading

• What the 10 largest companies in the world have in common
• ASX 200 closes higher, banks keep rising
• Ready to invest your first $2,000 in ASX shares? Do these 3 things first
• 2 ASX growth shares I’d buy before Afterpay shares
• 3 of the best ASX 200 tech shares for your watchlist

Tristan Harrison owns shares of Magellan Flagship Fund Ltd, MAGLOBTRST UNITS, and Washington H. Soul Pattinson and Company Limited. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of AFTERPAY T FPO, PUSHPAY FPO NZX, and Xero. The Motley Fool Australia owns shares of and has recommended Brickworks, BUBS AUST FPO, Kogan.com ltd, and Washington H. Soul Pattinson and Company Limited. The Motley Fool Australia has recommended PUSHPAY FPO NZX. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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