Structuring portfolios for market dipsStructuring portfolios for market dips

It’s impossible to say exactly when a share market dip will happen, and how far the dip will go—so it’s helpful to be prepared, and consider how to structure a portfolio to weather a market dip.

The big message: diversification!

Diversification is about spreading money across lots of different investments, so that you could take less of a hit if an investment loses value. This can look like diversifying across different geographies, sectors, and kinds of investments (or asset classes). 

Even in a market-wide dip, some investments may be hit harder than others. Having a diversified portfolio may help to even out the impact of a market dip across a portfolio.

It’s also worth thinking about how your money is diversified outside of your investment portfolio. For example, do you have an emergency fund? If something unexpected happens and you have a few months of living expenses saved up in a bank account that you can fall back on, you may be less likely to be forced to sell your investments earlier than you were intending to. 

Growth and value stocks

Growth stocks are shares in companies with sales and earnings expected to grow at a faster rate than the market average. They’re often more volatile, and less likely to pay dividends because they prefer to reinvest their profits back into future growth. As a general rule of thumb, growth stocks tend to perform better in rising share markets, and worse during market dips.

Value stocks are companies considered to be undervalued based on their share price, relative to metrics like earnings and revenue. They tend to be more mature businesses that experience less volatility and are more likely to pay dividends. Value stocks tend to perform better in market dips, and worse in rising share markets. 

Consider how your portfolio diversified across growth and value stocks? And what does this mean for your portfolio if the market takes a dip? As always, you don’t need to invest with an ‘all or nothing’ approach. Doing due diligence and making sure your portfolio is diversified are some of the ways to keep your investment risks in check.

What about defensive stocks?

Defensive stocks are companies that are well-established, tend to have strong cash flows, and pay regular dividends—regardless of the state of the overall share market. For example, utilities, big household consumer brands, and banks.

The advantage of these companies in a market dip is that they’re generally more stable—they don’t tend to drop as much as the overall market, and often continue paying dividends. And if they’re older, established companies, they may have weathered their share of market dips and might have mechanisms in place to weather this one. 

One downside is that these shares tend to underperform relative to the market when things start going upwards. It’s also worth remembering that even well-established companies can do poorly, or even go under. Just because defensive stocks usually weather downturns, doesn’t mean they always will. This is why diversification is so important. 

Think before selling

This is true at all times, but might be more acute during a market dip. Sometimes, companies start to fall in value, with no real hope of turning around. This could be because of factors such as poor management decisions, changes in underlying demand, or structural changes to the economy.

If this happens, some investors might consider selling low-performing investments and reinvesting in others with better prospects. Although these losses can hurt, it may sometimes be better off taking small losses early, rather than waiting to see if they’ll turn around. On the flip side, if you sell an investment and it turns around, you may have to pay a premium to buy back in—or just accept that you have missed the opportunity and move on. 

A key thing to remember is to check in on your investments regularly and review your portfolio when you need to.

Wrapping up

We can’t know for sure when the next market dip will come, or how long it will last. So it’s useful to think about how well prepared and diversified your portfolio and overall finances are for a dip. That way, you have the foundations in place for when one comes around.