How to protect yourself if Australian stocks tumble

Jason Prowd  |  16 November 2018  |  6 min read

Key Points
  • History tells us that a sharemarket correction can happen at any time.
  • According to ASIC, the Aussie sharemarket makes up just 1.7% of the world’s total sharemarket value.
  • Investors can reduce risk of severe loss by investing in a diversified portfolio.

As world markets continue to climb higher, we’re starting to hear more and more from the prophets of doom.

Just recently, billionaire US money manager, George Soros, warned that “we may be heading for another major financial crisis.

His words echoed those of fund manager, Bill Gross, who in the past year said that US markets are at their highest risk levels since the 2008 financial crisis.

These views would rankle anyone whose share wealth shrivelled in the GFC, particularly anyone now on the verge of retirement who can’t afford to see their savings implode.

I won’t go into the risks and timing of a future market downturn–history tells us it’ll happen sooner or later. I’ll rather set out some simple steps every investor can take to help protect their investments from taking a major hit. The aim here is to prepare, not predict.

What should your portfolio look like?

The key to sleeping well at night during a market meltdown is to have a diversified portfolio, ideally of undervalued assets. The problem is, research by Deloitte Access Economics tells us that over 40% of Australian investors do not hold diversified portfolios.

This is backed up by CommSec, which has found that smaller ‘mum and dad’ investors are heavily concentrated in local stocks like CBA, Telstra, Wesfarmers, Woolworths and BHP. CommSec has dubbed this type of portfolio the ‘Mums and Dads Index’. Investors holding this sort of portfolio are concentrating their risk, and not spreading it. It’s a bit like going to a casino and putting all your ‘hard-earned’ on black. Not a good idea.


Thanks for subscribing.

Please check your email address.

Focusing on Aussie stocks means you could be missing out

Investors with a narrow portfolio of Aussie stocks also risk missing out on other, more compelling investment opportunities – the pointy heads call this ‘opportunity cost’.

According to CommSec, the ‘Mums and Dads Index’ has underperformed the broader Australian sharemarket since 1999.

And, as Anthony Fensom pointed out in November 2017, it’s produced returns that are inferior to most global indices. From the end of 2012 to the end of September 2017, even accounting for dividends, the Aussie market returned 9.1% a year compared to 12.3% for the global benchmark.

If we just look at 2017, the relative returns from an Aussie portfolio are even worse. According to AMP Capital, Australian shares returned 11.8%, while global shares returned 13.4%, emerging market shares 30.6%, and Asia shares 36.3%.

The main problem is that our market lacks any significant tech stocks, which have been a major driver of overseas markets—businesses like Apple, Microsoft, Samsung, Amazon, Alphabet, and Alibaba. Instead, the Aussie market is dominated by the banks and fading blue chips like Wesfarmers, BHP and Woolworths. And even at Woolies, a quick glance at the shelves will reveal that not many of the products are made by locally listed companies. Similarly, Aussies come up short in pharmaceuticals, cars and telecommunications to name a few.

What should your portfolio look like?

In a word–diversified. Across different industries, different countries, and different asset classes. It’s essential to diversify across the whole global market. And you need to include large, small and micro caps—not to mention bonds and other fixed interest products.

If that seems too complex, relax. These days, it’s pretty simple for the average investor to gain instant and meaningful diversification. Instead of making hundreds of decisions, you only have to make one.

For example, Morningstar provides diversified ETF model portfolios (low-cost, diversified portfolio models—not actual portfolios) that offer investors a template for diversification. The portfolios are labelled Conservative, Cautious, Balanced, Growth and Aggressive (see the table below).

The ETFs invest in Australian and global shares and listed property, fixed interest, infrastructure and cash.

Source: Morningstar ETF Portfolios 

At Morningstar Next, we also offer three ready-made multi-asset portfolios to meet a range of needs and timeframes. They’re called Growth, Balanced and Cautious. The Cautious portfolio is ideal for risk-averse investors, and holds over 70% in cash and bonds.

Ultimately, regardless of whether markets are going up, down or sideways, diversification fortifies your portfolio. If you’re just starting out—good stuff—start with a diversified portfolio. If your portfolio needs a tune-up, it’s worth comparing to our benchmarks above. Over time you’ll achieve better returns, and perhaps more importantly, be able to sleep soundly knowing you’ve prepared regardless of what the market throws at you.


Jason Prowd leads Morningstar Next: ready-made investment portfolios.

More on this theme

Are your New Year resolutions on track? 6 steps to building a diversified investment portfolio Are your biases sabotaging your investments?

Looking for another way to save?

Explore our 3 ready-made investment portfolios. Get started today.

© Morningstar Investment Management Australian Limited (‘Morningstar’) and any related bodies corporate that are involved in the document’s creation. Whilst all reasonable care has been taken to ensure the accuracy of information provided, neither Morningstar nor its third-party providers accept responsibility for any inaccuracy or for investment decisions by any person on the basis of the information included. Past performance is not a reliable indicator of future performance. Morningstar does not guarantee the performance of any investment. Any general advice has been prepared without reference to your investment objectives, financial situation or needs. You should consider the advice in light of these matters and if applicable, the relevant disclosure document before making any decision to invest. Refer to our Financial Services Guide for more information.

You might also like...

Investing made simple.

Explore three ready-made portfolios, pick one that suits your needs and time-frame, decide how much to invest and we’ll take care of the rest.

Explore the portfolios