Three ways to protect your investments from a stock market crash

There is a recurring question being posed by investors right now: is there going to be a stock market crash? There is a very simple answer to this question: yes there is. Booms and crashes are part and parcel of the market cycle.

It might be simple, but this truism isn’t especially helpful. What people really want to know is whether a correction in share prices is imminent, and preferably the date on which it will happen. But while we can confidently say there will be another stock market crash at some point, we can’t predict when that might be.

Could it be in 2026? It could. But equally the market could rise another 20%, 50% or (who knows) 100%, before share prices take another significant tumble. In which case, sitting on the sidelines and watching the ascent will be painful.

This lack of visibility is no doubt enough to deter some people from investing at all. That approach doesn’t come without its drawbacks though. Anyone sitting out of the stock market over the long term is highly likely to receive lower returns from cash in the bank, and ultimately that means a smaller pot of gold at the end of the rainbow.

However, if you’re wary about investing, there are strategies you can employ to have your cake and nibble at it too. That’s the case whether it’s current market conditions which make you reluctant to invest, or if you are simply a cautious soul who wants to keep risk relatively low.

1. Regular savings to the rescue

One of the simplest and most effective ways to mitigate stock market risk is to set up a regular savings plan, which invests your money on a monthly basis. This means even if the stock market falls, your fresh investments buy in at cheaper prices. This leads to a smoother investing journey than sticking a lump sum into the market in one go.

The following example compares the return on £1,000 invested as a lump sum and through regular investment over five months.

This is just a hypothetical illustration and in a steadily rising market a lump sum investment would have performed better over this period. However, it is very rare for markets to go up in a straight line over the long-term.

This approach is most effective for those who are still building up their investment pot and are going to be saving for some years to come. If you’ve already done most of your saving and are close to retirement, or in it, you may have to pull other levers to dial down risk.

2. Asset allocation can dial down risk

One of those levers is to adjust your asset allocation. The investment world is not composed solely of shares. Investors can also put their money into bonds, and other assets such as gold, property, infrastructure, and absolute return funds. These other assets tend to perform differently to shares, and so when stock markets are falling, some of these assets may actually be rising.

Bonds in particular are widely used as a foil against stock market corrections. When shares take a tumble, there is often a flight to safe assets, and that often means investors buying bonds, pushing up their prices. This isn’t always the case, and there are times when both shares and bonds sell off, but nonetheless they are a useful tool for those looking to mitigate the risk of a portfolio comprised solely of shares.

How much you invest in shares versus bonds and other assets really depends on how much risk you want to take. A common cautious investment approach has historically been a 60/40 portfolio, which holds 60% in shares and 40% in bonds and other assets, but there’s no hard and fast reason to stick to that allocation. To add more risk, you could increase the stock market exposure, and to dial it down you could add more bonds.

If you want someone to pull these strings for you, it might be worth considering a multi-asset fund. These are funds which invest in a range of assets, but primarily shares and bonds, and they’re run by a professional fund manager. They come in a variety of risk profiles so you can pick one which suits your own enthusiasm for the thrills and spills of the stock market.

3. Diversify and rebalance your stock market portfolio 

As well as your asset allocation, you can also address risk within the stock market side of your portfolio by diversifying and rebalancing. Diversification across funds, stocks, sectors and regions means your portfolio is less vulnerable to poor performance in just one area making a big dent in your wealth. Regular rebalancing also helps to keep that diversification in place, otherwise strong performance from one area can lead to it swamping your overall portfolio. 

We’ve seen precisely such a dynamic play out in global stock markets over the last decade, with US stocks, and in particular the technology sector, performing exceptionally well. The result is that the S&P 500 now makes up over 70% of the MSCI World Index, one of the most common benchmarks of the global stock market. And within the S&P 500 itself, the Magnificent Seven tech titans make up over a third of the index. These US tech companies will therefore be writ large across many investors’ portfolios, and a downturn in this highly valued sector could therefore have an especially large and unwelcome impact.

The risks of not investing

Everyone knows investing in the stock market comes with the risk of losses attached. But there are other financial risks which tend to fly under the radar. Inflation risk is a big one. If you only ever hold cash, your returns may not match price rises over the long term, leading to a reduction in your buying power. 

There’s also the risk of reaching retirement without enough money to be comfortable. That can be addressed by saving adequately over your lifetime, but also by taking on the appropriate amount of stock market exposure. Risk and return are joined at the hip, and the more risk your take, the higher the returns you can expect in the long run.  

It’s perfectly understandable to be cautious with your wealth but that does probably mean lower long-term returns and therefore having to save more to hit your financial targets. Not everyone will have the stomach for being fully invested in the stock market, but the good news is there are plenty of investment options which can provide you with some exposure, while keeping risk in check.