Avoiding cyclicals is another way of reducing your exposure to stocks that might struggle in a downturn – that means companies like housebuilders and travel agents.
8. Don’t leave yourself over-exposed
Be wary of managers with large exposure to a small number of stocks.
No company is immune from a sudden shock – a fraud, an unexpected PR crisis or a harmful tweet from the American President who is awake too late and bored.
When you have only 2.5 per cent in any one company, if things go horribly wrong for one of your stocks it is not the end of the world for your portfolio.
It is not difficult to find 40 to 60 good ideas in global equity markets – there is no justification for being excessively concentrated.
9. Vet the debt
Companies with lots of debt are vulnerable if interest rates rise and the economy falters.
Interest can be an enormous drain on cash flow. We check balance sheets and company accounts intensively.
Fortunately, a lot of modern companies do not need as much plant and capacity as they used to, even in the growth phase. They invest in intangibles, like design and branding, rather than machinery and buildings.
Without financial leverage, they are more robust.
10. Look for moats
Seek out companies that are well fortified and can look after themselves in difficult times.
It might be that they have built a globally recognised brand or have technology that no-one can match.
They do not have much competition nibbling at their profit margins in a downturn and they can raise prices if inflation strikes.
Conclusion
It is impossible to time equity markets perfectly, so it makes sense for clients to remain invested and to ignore the constant doom and gloom headlines that might make them panic.
That does not mean your investment manager cannot reduce their risk.
History is no guide to the future, but following these 10 rules has, in my experience, helped save investors around 20 per cent of any downside, and left them better positioned to enjoy a recovery.
Simon Edelsten is manager of the Mid Wynd International Investment Trust and Artemis Global Select fund
