On some measures, the risks of a stock market crash are growing.
Historical trends suggest that market crashes follow extreme market instability or volatility periods. We have seen a lot of market volatility over the past couple of weeks. This suggests that investors are becoming cautious and easily swayed, which is never a good look.
At the same time, challenges such as rising inflation and higher interest rates pose risks to the global economy. So, it is not just market sentiment that could lead to a stock market crash, but also deteriorating economic fundamentals.
Difficult to predict
Unfortunately, it is impossible to predict the future of the stock market. More often than not, we only know that the stock market crash is in process when it is too late. There is generally no warning.
Further, there is no guarantee a stock market crash will even materialise. I have lost count of how many times I have seen analysts predicting a market slump over the past decade and a half, only for them to be proven entirely incorrect.
This presents a challenge for investors such as myself. How do I prepare for the worst while not panicking? How do I make sure my portfolio is protected while at the same time leaving the door open to capitalise on any profits if the market continues to push higher?
Stock market crash protection
The strategy I plan to use is to focus on high-quality growth and income stocks. By using this approach, I think I should be able to navigate any market environment.
These businesses should continue to prosper no matter what happens in the stock market. That is the theory anyway. They could be hit by rising prices and other economic headwinds, destabilising growth.
I will be taking these risk factors into account as I review the opportunities.
The life insurance and pension markets are both long term markets, which suggests they are both immune to short term market volatility. Indeed, it seems unlikely consumers will stop buying these products just because the stock market drops.
This is why I think Prudential and Aviva could be some of the best companies to own to ride out a stock market crash. As the world’s population grows, I think the demand for pension and life insurance products will only expand over the next few decades. These organisations can capitalise on this trend no matter what happens in the stock market over the next couple of months.
Another company I would buy for my portfolio is Tesco. I think it is incredibly unlikely demand for food in the UK will drop if the stock market falls. Therefore, I believe this retailer is one of the most defensive opportunities to buy right now.
While these businesses may not be completely immune to a stock market crash, I believe they exhibit qualities that should help them weather the storm.
Rupert Hargreaves has no position in any of the shares mentioned. The Motley Fool UK has recommended Prudential and Tesco. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
