Nobody likes to see the stock market crash.
With the exception of investors who have resorted to short selling, most of us are at risk of seeing our portfolios shrink when a bear market crashes.
With a stock market crash and a bear market technically defined as a fall of more than 20%, the S&P/ASX 200 Index (ASX:XJO) has yet to experience this difficult time in this year’s market sell-off.
From the August 13 high to the June 20 low, ASX 200 shares fell 15.7%.
Since then, the ASX 200 has rebounded strongly, up 9%, leaving the benchmark down 8.1% from last August.
ASX technology stocks fared less well amid rapidly rising inflation and interest rates. Although they also enjoyed some of the biggest rebounds since June lows.
From mid-November 2021 to mid-June, the S&P/ASX All-Tech Index (ASX:XTX) plunged 45%. Despite the big rebound since then, the All Tech index remains down 24% since November.
So, when it comes to tech stock investors, a stock market crash has happened.
What happens when the stock market crashes?
The current turmoil hitting equities around the world and raising fears of a stock market crash stem in large part from the unexpected rise in inflation and the resulting interest rate hikes by global central banks.
Rising geopolitical tensions and ongoing supply issues due to the pandemic haven’t helped either.
So who can ASX investors turn to during a stock market crash?
First, gold.
The classic safe haven metal has seen its value rise in six of nine stock market crashes between 1976 and 2020, according to GoldSilver.
When the ASX sold off in 2022, gold didn’t turn off the lights.
But the yellow metal didn’t fare too badly. On January 1, an ounce of gold was trading at $1,829. That same ounce is currently worth US$1,791, down 2%.
The same cannot be said for most ASX gold stocks, as evidenced by the 17% drop since the start of the year S&P/ASX All Ordinaries Gold Index (ASX: XGD).
One way to invest in physical gold through the ASX is to Betashares Gold Bullion ETF (ASX: QAU).
The currency-hedged exchange-traded fund (ETF) aims to track the performance of the price of gold. It uses currency hedging against fluctuations in the exchange rate between the US dollar and the Australian dollar.
QAU is down 2% in 2022 compared to an 8% loss posted by the ASX 200.
Bonds and inflation protection
Another safe-haven asset, if held to maturity, is a government bond.
If a stock market crash is caused by inflationary pressures, you might want to consider exchange-traded indexed treasury bonds (eTIBs).
What is that?
According to the ASX:
Exchange Traded Treasury Bonds (eTIBs) offer a convenient and easily accessible way to invest in indexed Treasury Bonds. Index-linked treasury bills are capital-indexed bonds issued by the Australian government. The capital value of the investment is adjusted according to the evolution of the consumer price index (CPI)…
Treasury index bonds are not traded on an exchange and are usually traded in large lots, which puts them out of reach for many investors. eTIBs have the appeal and convenience of being traded and settled electronically through the Australian Securities Exchange (ASX) in small or large packages.
In a stock market crash, make sure you’re diversified
The ASX 200 has been moving higher over the past few weeks. So maybe the worst is behind us.
But if we are in the face of a stock market crash, it pays to have a diversified portfolio.
In times of inflation with rapidly rising interest rates, look for companies with strong balance sheets that are unlikely to be hit by large increases in debt repayments.
Companies with ample cash flow that can continue to pay dividends also tend to be less volatile than growth stocks.
These can still drop during a stock market crash. But at least you will get regular income during the retracement.
And if you have a long-term investment horizon, history shows that well-managed companies operating in growth markets tend to reward their shareholders over time. Even so few, if any, are immune to a mid-term downside during a stock market crash.
So if you see the value of some of your cherished stocks take a hit, remember that these are just losses on paper unless you sell them during the retracement.
Finally, in times like these, it’s more important than ever to keep some powder dry.
In addition to having cash ready for unforeseen needs, you could recover a few thefts.
As my fellow jerk, Bruce Jackson, writes, “If the market does indeed test its June 2022 lows, this gives you an opportunity for more bargains.”
