Here’s how to ‘bullet-proof’ your portfolio

More than a year and a half of concerns about inflation, rising interest rates and extreme government spending have increased the uncertainty of the investment markets. For this reason, it is imperative for seasoned and novice investors alike to protect their portfolios.

I like to call this “bullet-proofing” your portfolio. There are some steps to take that will assist in this process.

The first is to review your stock’s resilience.

During the pandemic, the traditional rules of investing in established companies with strong revenue and profits seemed to have been tossed aside. According to Credit Suisse, one of the best performing styles in 2021 has been the basket of stocks with a high probability of defaulting on the firm’s debt.

Through Aug. 31, the stocks of these potentially defaulting companies were up more than 28% for the year, while the S&P 500 came in around 20%.

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However, in September, the markets provided investors with a reality check. The S&P 500 was down 4.8% for the worst month since March 2020.

What was the issue? Perhaps it was stubborn inflation, the possibility of rising interest rates or even continued supply chain problems, resulting in companies being unable to meet their earnings expectations for the remainder of 2021 and beyond?

As companies begin to report their third-quarter earnings, investors will find out exactly what happened.

If expectations for companies’ future earnings get cut, the market will not be kind, and these companies’ stock prices will tumble. Stocks with the loftiest valuations are the most venerable. It’s time to test your investments’ ability to withstand current headwinds and determine if they are indeed resilient.

A resilient company is one that can weather the volatility that comes with operating during a full economic cycle, including a recession. Will the company survive if its sales or profit margins decrease? Over the long-term, companies, just like your household, need consistent and positive cash flow.

Access to cash typically comes from two places. One source is sales of a company’s product (the company’s operations.) The second is financing through either loans (debt) or issuing new stock in the company.

Companies that have been established for a long period of time should have strong enough sales and profits so that rounds of new debt or stock issuance are not necessary. On the other hand, a company that has a new technology or a non-conventional product may need new financing for several years until its sales and profits become strong.

Both types of companies can be deemed resilient and therefore, less likely to suffer a major pullback in their stock prices.

Now, take a deep dive into the financial health of your…