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A Stocks and Shares ISA is a great tool that investors can use as a tax-efficient home for stocks. Even though it is best used as a long-term investment vehicle, it is still important to be active in buying and selling based on opportunities that arise in the market.
There are still talks about the possibility of a market downturn this year. With that in mind, here are some of my favorite ways to try and avoid it.
Finding Security Through Other Assets
As an immediate disclaimer, it is nearly impossible to protect an ISA 100% against a drop in value in the event of a market downturn. I’m not claiming that ISAs will go up in value when the market goes down. However, there are some good ideas that can help beat the average stock performance during 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. Generally, gold and similar metals are viewed as safe havens and stores of value. Hence during periods of panic, gold tends to appreciate in value.
We have seen this in action in recent months. With the US Fed raising interest rates, some are worried that it could push the US economy into recession. Gold price has increased by 8% in the last three months. Although gold stocks are not correlated correctly, there should be some change in the share price.
Targeting specific sectors and dividends
Another angle is to add new stocks to ISAs, especially from sectors like consumer staples and defense. Firms in these sectors should be less affected by market downturns because of their business model.
For example, if the crash is triggered by concerns around a cost-of-living crisis, manufacturers of luxury goods may struggle. But what about consumer staples, such as supermarket tesco, or a government contracting defense company such as bae systems, I don’t think investors will do much panic selling.
The third point deals with these areas. If an investor can find a company in this sector that also pays good dividends, it can act as a security. Even if the share price falls for a period after the crash, being able to take income in the process can soften the blow.
Here’s an example J Sainsbury’s, with a current dividend yield of 4.56%. As a side note, dividend income is not subject to dividend tax within an ISA. This is another advantage of using an ISA for investing.
no time to panic
As well as trying to hedge during a potential downturn, it is also important not to panic. It is about not just blindly selling stocks. As billionaire investor Warren Buffett said: “Be fearful when others are greedy and greedy when others are fearful.”
This can present some great long-term opportunities to buy undervalued stocks when the market is falling sharply.
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in the future. The content of this article is provided for informational purposes only. It is not intended to, nor does it constitute any form of tax advice. Readers are responsible for conducting their own due diligence and obtaining professional advice before making any investment decision.
The post 3 Ways to Protect Stocks and Share ISAs from Market Crashes appeared first on The Motley Fool UK.
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John Smith has no position in any of the stocks mentioned. The Motley Fool UK recommends J Sainsbury’s plc and Tesco plc. The views expressed on the companies mentioned in this article are those of the author 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 wide variety of insights makes us better investors.
Motley Fool UK 2023
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