Just how bad are the markets at the moment? While there are many negative headlines around weak economic growth, recession fears and volatile stock markets, equity performance figures have been far from disastrous.

The FTSE All-Share is up 7.1% so far this year – in line with historical annual returns from the stock market – and even higher gains have been recorded in the US (S&P 500 +16.6%, Nasdaq +20.4%), Germany (Dax +11.5%) and China (CSI 300 +26%).

Investors should be happy with these sorts of returns. So why the gloomy talk about the state of the markets? The key point is that there are dark clouds on the horizon and investors need to be aware that life could get a lot more difficult.

Time in the market is generally considered to be better than trying to time the market such as selling everything and hiding in cash when the outlook sours.

Markets can rebound faster than you think so it can pay to stay invested at all times so you don’t miss out when things pick up.

We’ve expanded on the theme in this week’s main feature which looks at a range of investment funds and how they’ve coped in previous market downturns, with a view to providing investment ideas for someone looking to reduce risk in their portfolio.

In the article we select eight funds which appeal on different levels. Many are designed to protect your capital and so they could be good products to consider if you are nervous about where markets are headed.

While there is no guarantee that they will stop you losing money, their approach could help you avoid very nasty falls in the value of your portfolio, albeit you may lag a new market rally.

If you prefer to invest purely in individual stocks then now would be an ideal time to review your portfolio. We spotted a comment from a private investor on Twitter on this theme which said they would stay in the market and simply sell stocks in their portfolio which might not survive a downturn.

On one hand this is a sensible approach, on the other hand it raises the question why someone is holding stocks that have vulnerabilities. The answer is that many investors like to ‘rent’ certain stocks short-term and ‘own’ others long-term. They accept higher risks for ‘rented’ stocks in the hope of making higher returns.

An example of a vulnerability includes a company with high levels of debt and fixed costs whereby a small drop in sales could result in a much larger drop in profit, thereby putting pressure on the ability to meet debt repayments.

Balance sheet strength is incredibly important when markets go through a bad patch.

Other types of stocks which look vulnerable in a market downturn include ‘story stocks’ where there is a lot of promise about earnings potential but no actual profit. Forget about spring cleaning – now is the time for the end-of-summer clear-out in your portfolio.

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