The Canadian and U.S. markets have dipped about 8% and 7%, respectively, recently. This is nowhere near a market crash, but we all know that market crashes are inevitable. Thankfully, there are things you can do to protect your portfolio and capital.
Now, you don’t want to necessarily sell all your stocks to avoid an inevitable market crash, because we haven’t the slightest idea when it will happen. If you exit the stock market altogether and the market recovers, you could be losing out on some serious gains.
Besides, over the long run, the market goes up. For example, if you bought shares of Fortis (TSX: FTS)(NYSE: FTS) before the last market crash, you would still have achieved a respectable annualized return of more than 7% per year from the investment.
Protect your portfolio
Review your portfolio and determine whether you’re comfortable with the allocations of your stocks. For instance, you may be happy allocating more of your capital in stocks, such as Fortis, which have very predictable earnings and returns.
In a market crash, Fortis stock will fall less than volatile names thanks to its stable business that has very little uncertainty. First, Fortis is virtually a regulated utility with about 97% of regulated assets.
Second, it’s largely in the transmission and distribution business, which are essential services to the everyday lives of its customers.
Third, Fortis is one of the top dividend growth stocks in Canada with one of the longest dividend-growth streaks (i.e., more than 40 consecutive years of dividend increases).
Protect your capital
Each time you receive a dividend from Fortis, it’s as if you’re getting some of your investment back. In this way, you’re sort of protecting your capital. Fortis’ dividends are consistent and predictable, unlike stock prices.
Currently, Fortis offers a 3.8% yield at $46.91 per share as of writing. Whenever the company increases its dividend or its stock price drops such that it offers a yield of 4% or higher, it’ll be a good time to consider buying the stock.
Other than protecting your capital by getting some returns back from dividends, you can also opt to take at least partial profits from fully-valued stocks. Unfortunately, determining stock valuations is as much an art as a science. One guy can say Fortis is expensive today, while someone else can say it’s a good value.
In my opinion, Fortis isn’t quite at a cheap enough level for a purchase, but it’s not at dangerous valuations that it must be sold either. It trades at a price-to-earnings multiple of about 18.5, which aligns with its long-term normal multiple. So, the stock tends to command a premium multiple because of its stability and predictability.
Investor takeaway
If you’re worried about a market crash, consider rebalancing your portfolio and at least selling partially your fully-valued stocks. Furthermore, you can build and sit on a cash pile to wait for better buying opportunities in a market crash.
Collecting dividends is a good way to help you build that cash pile. For example, some fund managers are sitting on 10-30% cash in their equity portfolios.
