How to Protect Yourself Against a Potential Market Selloff

The warning bells for another market crash have been tolling since 2020, yet it’s difficult to predict whether a market crash is coming or not.

| More on:

Every investor would be (and should be) interested in predictions regarding a market correction — whether you want to prepare your portfolio and leverage potentially low prices or buy a few profitable businesses at great discounts. A market crash could be triggered by a colossal selloff where investors try to realize the profits they’ve made from their recovery stocks.

Right now, the probability of a market crash happening — or not — is about 50/50. There are indications favouring both outcomes. Let’s take a look at both scenarios.

No, a market selloff is not approaching

Oil is making a comeback. Oil producers around the globe are taking measures to ensure that the production is in-line with the need to eliminate the surplus oil that was accumulated when the demand for oil hit rock bottom at the height of the pandemic. This is good news for an economy like Canada’s, which relies quite heavily on oil.

The tech rally that led the market recovery is still going strong. The S&P/TSX Capped IT Index is still rising, and has now grown over 112% from its lowest point last year. Other sectors are well on their recovery journey, and the number of new cases and deaths has come down significantly.

Yes, a huge market selloff might be approaching

There are just as many — if not more — indications to endorse the fear that a market selloff might be on the horizon. The new COVID strains have forced the government to set strict travel restrictions (by air as well as by land).

If interest rates keep rising, the probability of a housing market crash could also increase.

If a market crash is on the horizon, you might want to look into a generous Dividend Aristocrat Exchange Income Fund (TSX:EIF) to your portfolio. The company is still a good buy, thanks mostly to its mouthwatering 6.14% yield. But due to its powerful recovery, which made the stock grow over 162% in less than a year, the stock is a bit overpriced right now.

Should we witness a correction at some point, you might be able to bag this airline-industry-dependent stock at a significant discount. In the last crash, the share price fell by about 63% from its pre-crash high.

Foolish takeaway

If you believe a market selloff is approaching, consider arranging some liquidity so you can cherry-pick great investment opportunities. Your existing portfolio could be fine if you made the right changes before or after the 2020 crash and is now made up of resilient stocks. Alternatively, consider making a few adjustments and anchoring your portfolio with safer assets.

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 Adam Othman has no position in any of the stocks mentioned.

More on Dividend Stocks

A man smiles while playing a video game.
Tech Stocks

A Few Years From Now, You’ll Wish You Bought This Undervalued Stock

A dividend-paying but undervalued tech stock is a buying opportunity for both income and growth investors.

Read more »

a sign flashes global stock data
Dividend Stocks

3 Reasons to Buy TMX Group Stock Like There’s No Tomorrow

TMX Group (TSX:X) is Canada's biggest stock exchange owner.

Read more »

Train cars pass over trestle bridge in the mountains
Dividend Stocks

Canadian National Railway Stock is on Sale: Why Now is the Time to Invest

CNR stock has long been a top stock, with a solid position in a railway duopoly. But right now is…

Read more »

ETF stands for Exchange Traded Fund
Dividend Stocks

This 7.9% Dividend Stock Pays Cash Every Month

We all want dividends, and having them come out monthly is ideal! But this might be a strong choice for…

Read more »

Electricity transmission towers with orange glowing wires against night sky
Dividend Stocks

Is Northland Power Stock a Buy for its 6% Dividend Yield

Northland Power stock is cheap and ready to move higher as major projects near completion. In the meantime, we have…

Read more »

space ship model takes off
Dividend Stocks

3 Top Canadian Stocks That Just Increased Their Dividends (Again)!

These three top Canadian stocks just increased their dividend. No surprise since they have a great record of growing earnings…

Read more »

Canadian flag
Dividend Stocks

This Canadian Dividend Stock Pays at 11.2%

A high dividend yield is awesome, sure, but is this dividend stock still a great buy with that 11.2% yield,…

Read more »

Hand Protecting Senior Couple
Dividend Stocks

3 Blue-Chip Stocks So Safe Canadians Can Hold Them Until They Die

Canadian National Railway (TSX:CNR) is a stock worth owning for life.

Read more »