How to Protect Your Portfolio Before Markets Get Volatile in 2026

Portfolio Protection Strategies Every Investor Needs for 2026

Predicting the future in markets is close to impossible, but there are indicators that can help frame the range of scenarios that may unfold.

Taking a devil’s advocate view, several risks are worth acknowledging. Rising China US political tensions, the US moving deeper into the later stages of its debt cycle as fiscal deficits widen, and pockets of excess linked to the AI driven tech rally all introduce potential fault lines.

That does not mean a recession is imminent or that markets are heading for an inevitable downturn. Making that call with confidence is unrealistic. Historically, however, the economy experiences a recession roughly once every 5 to 6 years, and the post Covid period has been unusual.

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Even Rate Cuts Can’t Stop a Market Unwind

The sharp V shaped rebounds we have seen were driven by unprecedented monetary stimulus, with the Fed expanding liquidity on a scale not previously seen. Against that backdrop, the more relevant question for investors is not whether a sell off will occur, but how portfolios are positioned if one of these catalysts does trigger a period of market stress.

To understand what typically happens in moments like a potential AI driven unwind, history provides a useful guide. During the 2001 tech bubble collapse, the Fed did not immediately turn to money creation.

Instead, it cut interest rates from 6.5% to 1%. Despite this support, the Nasdaq fell roughly 78% from its peak over a relatively short period, and many unprofitable companies failed outright. Even high quality businesses were not spared in the short term.

Amazon lost close to 90% of its value, while Microsoft entered a long period of stagnation despite remaining profitable and financially strong. Rate cuts helped stabilise the broader economy, but they did not lead to an immediate recovery in asset prices.

How the Fed’s Money Creation Rewrote Market History

The situation in 2008 was materially different. When the financial system itself began to break down, interest rate cuts were no longer sufficient.

The Fed was forced to introduce large scale money creation, expanding its balance sheet from around US$900 billion to approximately US$4.5 trillion.

In the early phase of the crisis, investors rushed into the US dollar as a safe haven. Over the following years, however, that liquidity weighed on the currency as money supply expanded. At the same time, US government debt issuance rose sharply, yet yields fell to historic lows as demand for safety and central bank buying overwhelmed concerns about supply.

What this means for your portfolio and equities

So what does this mean for equities today. We reference these historical examples to give investors context on how markets have behaved in past periods of stress and what that can imply for portfolio positioning.

For growth focused tech investors who naturally take on more risk, this may be an appropriate time to consider areas of the market that have underperformed over the past five years and now offer more compelling value.

Healthcare stands out as a clear example. Regardless of whether the economy is in recession or expansion, demand for healthcare remains resilient.

The sector can lag when mega cap technology dominates index returns, particularly when capital is concentrated in a narrow group of AI related winners, but that lag can create opportunity over a full cycle.

Healthcare stocks:

– Pro Medicus
– CSL Limited
– Cochlear Limited

Consumer staples present a similar dynamic. These businesses often fall out of favour when growth is strong and risk appetite is high, as they lack the excitement and structural growth narratives of technology.

However, when sentiment shifts and fear rises, staples are often rerated as investors seek earnings stability and defensive characteristics.

For portfolios heavily skewed toward technology or growth, adding exposure to healthcare and consumer staples can improve balance and resilience without sacrificing long term return potential.

Consumer staple stocks:

– Woolworths
– Metcash
– Coles

It is also important to look beyond sectors and assess geographic concentration. Many investors underestimate how exposed their portfolios are, either to their domestic market or disproportionately to the US.

Elevated fiscal deficits and signs of a softening labour market are potential pressure points for US equities if sentiment turns.

In our view, broader geographic diversification across Europe, China, the US, Australia, and India is a sensible way to manage this risk. This can be achieved efficiently through ETFs, allowing investors to reduce concentration risk without relying on individual stock selection.

International ETFS

– Vanguard MSCI Index International Shares ETF
– iShares S&P 500 ETF
– Vanguard All-World ex-US Shares ETF