How to Protect Your Portfolio in a Market Downturn

Concerned about a market correction? Morningstar Investment Management's Dan Kemp explains you can you buy portfolio protection - but it won't be cheap

Dan Kemp 26 May, 2017 | 12:17AM
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Dan Kemp: As valuation-driven investors we're constantly searching for assets that are priced below their fair value. Warren Buffett put it best when he says, "I like my stocks like I like my socks on sale." The challenge is that as prices rise, there are fewer stocks on sale. It's more difficult to identify value, which has become more concentrated in certain sectors and emerging markets like Russia.

There are two drawbacks to this. The first is that markets are more vulnerable to a sharp downward movement as prices correct back to long-term norms; and secondly, there are fewer drivers in the portfolio increasing the risk of any one driver derailing future returns.

Now, this probably isn't an issue if you are a very long-term investor. You can afford to ride out these ups and downs in the market. But if you have a shorter-term investment horizon, this can pose a significant risk that you won't get back as much as you need. So, one of things that you can do is take out some form of portfolio insurance, buying an asset that will counteract some of these market moves.

One of the best value forms of insurance that we found is U.S. government bonds, which tend to work in the opposite way from equity markets and have become much better value over last year. And so, that's an area that we are looking at quite closely at the moment. But remember, all insurance has a cost and the payout is uncertain. So, don't buy it unless you need it.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Dan Kemp

Dan Kemp  is Chief Investment Officer, Morningstar Investment Management EMEA