October is an interesting month. Day light savings kicks in bringing with it an extra hour of happiness. Shorts and skirts come out to play as the temperature heats up, horse racing begins and the cricket season gets underway. It’s often called the transition month. According to the Yanks however, October is the month of ghosts, ghouls, gobblins and pesky little kids that bang on your door asking for lollies. Thank goodness Australia doesn’t partake in such rubbish. But recently I have noticed that Halloween is starting to become a thing. Really? How un-Australian. What next? Vegemite tastes horrible? That’s just un-Australian and it irritates me. I wouldn’t be at so critical if kids knocked at my door and said “G’day, 4 Four’n Twenty.” Sure no problem. I’d even thrown in extra packet of sauce. Well just in-case kids do come knocking on my door this year, I’m ready and waiting. I’ve prepared a basket of goodies ranging from apples, oranges, pears to rice cakes and a box of crackers. It’s really in their best interest to eat healthy don’t you think? Either way, trick-or-treat, they’ll be getting a health snack this year. From me anyway. And if anyone tries to be smart, watch out. I’ve got another basket full of eggs. Ready and waiting. Would you believe a little rascal egged my house last year?

But October also has a special place in finance which is known as the October effect. Besides May, the month of October is one of the most feared of all months. Investors tend to get nervous around October because it’s known for stock market crashes. Seven of the last twenty stock market crashes in the US have occurred in October. These include – the Panic of 1907, Black Tuesday the Wall Street crash in 1929, Black Monday in 1987, Friday 13th mini-crash in 1989, the October 1997 sell-off triggered by the Asian crisis and the 2008 GFC. I’m yet to find a convincing explanation as to why October has so many disastrous days. It could be the scary pumpkins. Either way, I’ve put together a list of assets to hold and avoid. The market has been running hot for a while now, so it wouldn’t take much to cause a crash. For example North Korea triggering World War 3, US tech sector crash, Chinese credit crunch, an Italian EU exit or Trump being impeached would all have terrible consequences. So we’ve listed a few assets that will help protect your portfolio in such an event and some that you want to avoid.

Protection on the downside

Now we’re not saying a stock market crash is imminent, but for any reason if there is a collapse, equities are usually sold off across the board. Here are assets that will weather the storm.

  • Absolute return funds – Absolute return funds aim to produce positive returns regardless of the prevailing market conditions. Even when markets are tumbling an absolute return fund still has the ability to make money. Here are some of the types of funds available under this banner: Long short equity strategies, relative value strategies, event driven strategies, global macro strategies, managed futures funds and multi-strategy funds. The underlying investments in these funds can include bonds, currencies, derivatives, futures, metals, money markets, mortgages, options, real estate securities, swaps, stocks and warrants. A good example here is the Triple3 Volatility Advantage Fund. It’s a unique fund that is volatility focused designed to create alpha from exchange traded VIX options on the S&P 500 Index. This fund is purely designed to protect investors against market downturns through the use of options. It’s complementary for a diversified portfolio and helps limit portfolio falls during a market collapse.
  • High yielding cash interest products – One of the easiest and safest ways to reduce risk in your portfolio is by investing in cash. But with term deposit rates at around 2.50%, cash products aren’t very attractive. For that reason we recommend investing in either a fixed or floating rate bond fund. Interest rates on bond investments which never change, or floating. Whether one is better than the other depends on the situation. The rule of thumb is: When rates are very low, you want to take advantage of floating-rate investments so that you’re not locked into low rates when interest rates rise. And the opposite is also true. Our recommendation is that investors look at the Smarter Money Investments Higher Income Find. Which is a low duration, short-term fixed-interest investment solution that targets returns that outperform the RBA’s cash rate by 1.5% – 3.0% per annum after all fees. The fund holds a portfolio of Australian deposits, Australian investment-grade bonds (mainly issued by banks) and hybrids issued by banks and companies.
  • Alternative investments – Allow investors to gain exposure outside of your traditional fixed income and equity. They are not a direct fixed-income or equity claim on the assets of an issuing entity. A bond or equity owns a claim on certain specified assets of the issuer. Alternatives don’t have this claim. They are usually options or futures contracts on an object of value such as gold or oil. Alternative assets also include pooled investment vehicles such as hedge funds, venture capitals or private equity funds. The good thing about alternatives is that they usually have a low correlation to the equity market or fixed income. It’s a well-known fact that during times of extreme volatility, investors move to safe haven assets like cash and gold. We recommend the Perth Mint Gold ETF. PMG is structured as a fully paid call option to one hundredth of a troy ounce of physical gold and may be exercised at any time. PMGs trade on the ASX under the code PMGOLD and can be purchased by investors only on the ASX.

Avoid these sectors/assets in a stock market crash

  • Bubbles and speculative stocks – During a stock market collapse, everything gets hit in equity world. Nothing is spared. In 2008 every equity category fell. But there are certain sectors such as healthcare, consumer staples, telecoms and REITS that can hold up a bit better than the rest of the market. The stocks you don’t want to be left holding are speculative bubble stocks. Ones that are trading on high multiples or have no earnings, are the ones that tend to get smashed at the blind of an eye and in some cases disappear altogether. Most speculative stocks have risen to lofty valuations caused by a bubbling sector. Two such bubbles are the current lithium boom and the baby formula boom that have pushed stocks to sky high valuations. Both sectors have had a phenomenal run the last six months and there have been some stellar returns. Whilst we don’t see any crash on the horizon, we think it could be a good idea for those who hold investments in bubble stocks to set tight ‘rolling’ stop losses. So in the event of a downturn, the position is sold.
  • Stocks that have a high number of short positions – Short-selling is the opposite of investing/buying. When shorting an investor aims to sell a stock that isn’t owned at the highest price possible and then buy it back at a lower price when the stock falls. During a market collapse, a stock with a heavy percentage of short positions will fall a lot further that one with no short positions. Each week we feature the top 30 shorted stocks on the ASX can be found on the ASX or ASIC websites. Stocks like Myer (MYR), Domino’s Pizza (DMP) and Syrah Resources (SYR) are usually heavily shorted.

Whilst there are signs such as recent geopolitical events that can cause a September 11 type sharemarket collapse, we don’t have a crystal ball and can’t with any confidence say that this will be the case. A crash can occur at any time or it may not occur for some time. What we do urge is that investors protect themselves from a catastrophic losses by using some of the strategies mentioned in this article. That way in the event an unforeseen catastrophe, you’ll be able to sleep at night knowing your portfolio is protected from any downside crash.