The Motley Fool

Worried About a Stock Market Correction? 2 Ways to Lower Your Portfolio’s Risk

analyze data
Image source: Getty Images

In recent weeks there has been a lot more concern from investors about the state of the pandemic worldwide. The Delta variant is highly contagious and is even threatening countries with high vaccination rates now. This has some investors worried that we could see another stock market correction.

Already we are seeing some recovery stocks pull back. Even oil prices and energy stocks have sold off, while gold and other safe-haven assets have started to rally.

Of course, anytime there is uncertainty, that inherently means there is more risk in the markets. Despite this uncertainty, though, ultimately, nothing may happen. Nevertheless, you should be prepared anyway.

This doesn’t mean you should sell all your stocks. It just means make sure you’re prepared for short-term volatility. So here are two ways you can lower your portfolio’s risk if you’re concerned about an upcoming stock market correction.

Review your existing portfolio

The first thing you’ll want to do is look over your portfolio today. You’ll want to make sure that you don’t own any highly risky or speculative stocks.

All the stocks you own should be high-quality companies, and you should be committed to them for the long run. This way, if a stock market correction does take place, and it takes a little while for the market to recover, you can be patient and hold your investment, rather than having to sell for a loss.

It’s also important to make sure you have some cash on hand. This can be important for two reasons. First, you’ll want some capital in case of a market correction to take advantage of stocks trading cheaply.

However, you’ll also want to make sure you have enough cash in case of an emergency with your personal finances. This way, you definitely don’t have to sell off any of your assets while they are undervalued.

Defensive stocks are ideal during stock market crashes

Once you have reviewed your portfolio, if you still want to decrease risk and protect more of your money, you could consider adding some defensive stocks.

Defensive stocks are ideal for a few reasons. First, these stocks have highly robust operations. So while a recession or shutdown may impact some businesses, defensive stocks will be highly resilient.

The other reason is that these stocks have lower volatility. Because investors know these companies have resilient earnings, they aren’t sold off as much as other stocks. This leads them to have a lot less volatility than the rest of the market. Therefore, during a stock market correction, they are some of the best at protecting capital.

A perfect example of a top defensive stock in Canada is a business like Algonquin Power and Utilities (TSX:AQN)(NYSE:AQN).

Algonquin is the perfect defensive stock because two-thirds of its operating income comes from its utility segment. This includes gas, electric, and water services across numerous states, a highly safe business. Even its renewable energy segment is quite robust and offers a tonne of growth potential over the long term.

This is why Algonquin is a great stock to add to your portfolio. During times of uncertainty, you can count on the business to remain strong. And during periods of growth, it has a tonne of potential to expand operations.

The dividend stock is one of the most resilient there is and currently offers a yield of more than 4.3%. So if you’re worried about a stock market correction and want to add some stability to your portfolio, I’d look to buy high-quality companies like Algonquin.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Daniel Da Costa owns shares of ALGONQUIN POWER AND UTILITIES CORP. The Motley Fool has no position in any of the stocks mentioned.

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss an important event.

Iain Butler and the Stock Advisor Canada team only publish their new “buy alerts” twice a month, and only to an exclusively small group.

This is your chance to get in early on what could prove to be very special investment advice.

Enter your email address below to get started now, and join the other thousands of Canadians who have already signed up for their chance to get the market-beating advice from Stock Advisor Canada.