Build a Rock-Solid Portfolio to Withstand Market Crashes

0 Posted by - November 1, 2016 - Uncategorized

I loathe market crashes. After years of analyzing, strategizing and building up an account, the market pulls the rug from underneath you. While almost every stock falls hard in a crash, some fall much harder than others.

Stocks which have a rock-solid foundation hold up better than stocks which are so focused on growing and re-investing capital that they fail to plan for a recession. What sort of brick-like components should you look for?

Below are 4 factors that I feel are linked to bear market protection.

Annual Positive Earnings Streak. The longer a company can maintain profitability, the more stability it has. Making a profit when the economy is hot is no big deal – having positive earnings during a recession is a very big deal.

Consecutive Earnings Increases. In addition to a long streak of positive annual earnings, a great company knows how to consistently grow. This factor does not look at how big the growth is, simply that this years earnings are higher than the last year, which is higher than the year before that, and so on.

Quarterly Earnings Stability. Stable income creates stability in share prices. This factor looks at the last 20 quarterly earnings figures and rewards firms which have less earnings variance. We all have that uncle who shows up driving some fancy new pimped out Mercedes Benz at the family reunion but later must remortgage his house for the 10th time. If a stock reminds you of your rags to riches to rags uncle, you should take a pass. Unless it is your uncle, then you should let him sleep on the couch for a night.

Consecutive Dividend Increases. There is an entire strategy called Dividend Growth Investing which focuses on stocks which have raised their dividends for many years in a row. The theory is that having a stable and increasing dividend shows the management’s confidence in the future prospect of the firm. When a stock cuts, freezes or throws out the dividend altogether, this doesn’t give you a warm fuzzy feeling in your stomach. More like reading a book sitting backwards in a car after having eaten a greasy hamburger. I look for stocks which have increased their dividends annually – but I quit counting after 9 years as I figure that’s enough.

This next test ranks all stocks in the Russell 3000 index since 1999. I create 20 portfolios based on the comprehensive score from the above 4 factors. The portfolios are re-examined and re-balanced weekly. I also remove any stock with a price under $20 per share based on the theory of this SSRN whitepaper.


This diagram shows us that higher ranks generally produce higher returns. But we are not as much concerned about the whopping big annual return as we are about the overall stability of the portfolio – the performance in bad markets.

The next test is to select the top ranked 25 stocks in the Russell 3000 index with weekly re-balancing.


Even though we re-examine our portfolio weekly to ensure we hold the top 25 ranked stocks, we still typically hold each stock for an average of 9 months. You will notice that this system didn’t keep up to the market in the dot-com boom, but that is the point of the system. You have fundamentally sound firms that flex their muscles when it counts – in a recession or bear market. This portfolio still beat the market over the long-term and did so with much less volatility and bear market downside. A real castle worth investing in if you ask me.


If you want to use this Fundamentally Stable stock screen, I encourage you to freely do so by using the link to copy, alter and save it into your own account. If you don’t already have a Portfolio123 account, please read my first post here on how to get started.


  • Bob Wells November 6, 2016 - 12:08 pm Reply

    Good luck on the new blog. I would add a 5th area to this examination – Investment Grade Credit. Dividend Growth Stocks with credit of BBB or better stand a greater likelihood to survive severe markets better than those that don’t.

    Take Care
    Bob Wells

    • HemmerlingWP November 6, 2016 - 3:16 pm Reply

      Very good point. Especially important looking down the barrel of rising interest rates and the ability to repay debt. Unfortunately for me, this is not a factor that Portfolio123 has access to yet…but I will put in a request.

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