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3 Quick Steps to Protect Your Portfolio from a Market Crash

As of last Friday, the Strait Times Index (SGX:^STI) or STI has more than doubled since the bottom of the Great Financial Crisis. In fact, the STI ETF (SGX:ES3), a proxy for the market barometer, has climbed more than 125% in share price alone since its closing price on 9 March 2009 up till the close last Friday.

With a huge rise in the share market now behind us, it may be natural for individual investors to start worrying that a market crash lurking around the corner. For this, Foolish investors might want to consider three extra steps to come out stronger from the next market crash.

  1. Focus on the long term

There may be the popular idea to just wait for the next crash in order to invest. One problem with that idea, though, is that it is incredibly difficult to know when the next market crash is going to be. In fact, as my fellow Fool Ser Jing points out, missing the 10 best days in the past 21 years in the STI may reduce your annualized returns to 0.12% per year.

With that in mind, Foolish investors might find better returns by finding the best companies there is in the share market, and investing in them with the long term in mind. And, the hunt for great companies should continue, regardless of market conditions. That hunt will bear fruit one day, as you do not want to wait for market crash before starting your homework.

2. Have a “cash cushion”

Personally, I prefer to keep a cash position available to take advantage of market corrections or opportunities which may arise from time to time. I find that having this “cash cushion” also helps give a calming effect to enable me to take advantage of corrections in the share market. Share price movements may have an effect on how we behave, so this is one of the ways I deal with it.

With a cash cushion, the Foolish investor can then focus on finding the right discipline to deploy their funds in an orderly manner. Limiting my cash deployments also has the side effect of forcing me to pick the best of the best ideas when there is a market crash.

3. Stay diversified

Some investing masters may prefer putting most of their eggs in one basket, and carefully watching that basket. But for me, I prefer to stay diversified across my portfolio. Diversification can come in spreading out your money across different ideas. The side benefit of studying more companies is that it gives me a more complete view of industries, and the chance to compare strengths among its participants.

On top of that, diversification can also come in spreading your money to invest over time. After all, investing in narrow moments of time might not give the best outcomes.

Foolish bottom line

The attentive Foolish investor may notice that the three steps that I suggested are mainly about preparing a state of mind. Psychology might play a big part on whether or not we are able to execute our best laid investing plans. To quote the retired boxing professional, Mike Tyson:

“Everyone has a plan, until they get punched in the face”

This quote might as well be describing investing during market corrections. It might always be as easy as we think it will be. So with these simple steps, we might just stand a better chance to “punching back” at the share market, and taking on cheaper share prices for our best ideas.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Chin Hui Leong doesn’t own shares in any companies mentioned.