3 ways to try and protect a Stocks & Shares ISA from a market crash
A Stocks and Shares ISA is a great tool investors can use as a tax-efficient home for stocks. Even though it’s best used as a long-term investment vehicle, it’s still important to be active in buying and selling, depending on what opportunities arise in the market.
There’s still continued chatter about the potential for a market crash this year. With that in mind, here are some of my favourite ways to try and protect against this.
Finding protection via other assets
As an immediate disclaimer, it’s almost impossible to 100% protect an ISA against falling in value in the event of a market crash. I’m not claiming that while the market falls, the value of the ISA will rise. However, there are some good ideas that can help to outperform the average stock performance over this period.
To begin with, an investor can add more stocks related to gold and other precious metals. Mining and commodity traders are good examples here. Typically, gold and similar metals are seen as safe havens and a store of value. So during a period of panic, gold tends to appreciate in value.
We’ve already seen this in action in recent months. With the US Fed raising interest rates, some are concerned this could push the US economy into recession. The gold price has spiked by 8% over the past three months. Although gold stocks don’t have a perfect correlation, the share price should mirror some of the move.
Targeting specific sectors and dividends
Another angle is to add new stocks to the ISA, particularly from sectors such as consumer staples and defence. Firms in these areas should be less impacted by a market crash due to their business models.
For example, if the crash is triggered by concerns around the cost-of-living crisis, luxury goods manufacturers could struggle. But what about consumer staples, such as a supermarket like Tesco? Or a government-contracted defence company like BAE Systems? I don’t feel investors will panic sell as much.
The third point ties in with these sectors. If an investor can find a company in this space that also pays a good dividend, this can act as a protection. Even if the share price falls for a period after the crash, being able to pick up income in the process can cushion the blow.
An example here is J Sainsbury, with a current dividend yield of 4.56%. As a side note, dividend income isn’t subject to dividend tax within the ISA. This is another perk of using the ISA for investments.
Not the time to panic
As well as trying to protect during a potential downturn, it’s also important not to panic. This doesn’t just relate to not blindly selling stocks. As billionaire investor Warren Buffett said: “Be fearful when others are greedy and greedy when others are fearful.”
When the market is falling swiftly it can present some great long-term opportunities to buy undervalued shares.
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.
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Jon Smith has no position in any of the shares mentioned. The Motley Fool UK has recommended J Sainsbury Plc and Tesco Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
Motley Fool UK 2023