7 Survival Steps for The Next Market Panic
It’s the Friday after the July 4th holiday. Many people are taking the day off and trading on Wall Street will be light. But don’t get too complacent in your hammock. The stock market remains volatile, with mounting risks at home and overseas.
When the proverbial “stuff” hits the fan, will you be ready?
Sure, stocks over the long term have historically bounced back from even the worst corrections. But as economist John Maynard Keynes famously said: “In the long run, we are all dead.”
What did this giant of the economics field mean by his oft-quoted remark? Simply this: Immediate financial needs often can’t wait for historical inevitability.
In these perilous market conditions, if you’re a new retiree or getting ready for your golden years, you must emphasize preservation of capital without incurring a disproportionate opportunity cost.
I’m not an alarmist by nature, but there’s no sense in denying reality. Investors are recklessly underestimating a wide array of risks, including trade war, high valuations, and a sputtering global economy. Hopes for a rate cut from the Federal Reserve this month are probably misplaced.
Trade tensions may have eased this week, but the U.S. and China are now embroiled in a new cold war that’s likely to clobber investors with “blowback” at some point down the road.
Tariffs raise input costs and dampen economic activity. No one wins a trade war, especially when it’s being waged by the world’s two largest economies. The trade “truce” announced at the G-20 summit last weekend represents mostly public relations rather than substance.
Let’s be clear: I’m not one of those professional prophets of doom who’ve been predicting the collapse of global capitalism ever since President Nixon took the U.S. dollar off the gold standard in 1971.
You can simultaneously stay in the game, while preparing for the worst, by taking these seven “crash proof” measures now.
1) Recalibrate your asset allocations.
The rest of this year promises to be uncertain, with choppy trading and sell-offs ahead. Your capital preservation strategy should include the right asset allocation, tailored to your financial goals.
Asset allocation is an art as well as a science. It’s the investment alchemy whereby you balance several ingredients for the proper admixture of risk and reward. If you’re too heavily weighted towards risky growth stocks, you could pay a steep price in the coming months if many analysts are correct and an economic downturn occurs.
According to some financial industry studies, about 90% of portfolio performance is related to asset allocation. That’s an eye-opening statistic.
Of course, in a bull market, your allocation should emphasize stocks. In a bear market, you should lighten up on stocks in favor of bonds and cash. And in a transitional market that’s “in between,” you should strike a balance. At all times, your portfolio should steer clear of overvalued equities.
For general guidance on how to divvy up your portfolio under the existing investment climate, take a look at the following chart.
Keep plenty of cash on hand, for the bargains that are sure to arise if and when the market crashes.
If your portfolio takes a sharp turn for the worse when you’re in your 40s, you still have plenty of time to bounce back. But if your investments take a nosedive while you’re, say, 65, you’re in a far worse predicament.
2) Make sure your portfolio contains gold.
Geopolitical turmoil and market volatility will probably propel the price of gold in the coming months. In recent weeks, we’ve already seen a spike in gold prices.
The rule of thumb is for an allocation of 5%-10% in either gold mining stocks, exchange-traded funds (ETFs) or the physical bullion itself.
3) Go to bonds for ballast.
In turbulent waters, bonds can help steady the ship. You may be a growth investor and still several years from retirement, but in volatile times such as these, don’t give short shrift to fixed-income. I recommend bond funds, for greater diversification.
Not all bonds get crushed when the Federal Reserve tightens. Notably, short-term bonds are less vulnerable to interest rates than longer-term bonds.
4) Decrease your portfolio’s weighting in cyclicals.
This is no time to be heavily weighted in cyclical sectors, such as consumer discretionary goods. During this latter stage of the economic recovery, rotate into non-cyclical, more stable companies that provide services that are consistently used regardless of market or economic conditions.
Utility and real estate stocks are great examples. Indeed, the utility sector has been on a tear so far this year; this outperformance should continue as investors seek safe havens.
5) Diversify among asset categories.
Spread your portfolio among value, large-cap, mid-cap, small-cap, growth and income stocks. One often ignored move is to invest in mid-caps, which provide greater growth potential than large caps but less risk than small caps. A mid-cap is generally defined as a company with a market capitalization between $2 billion and $10 billion.
6) Seek global diversification.
Don’t withdraw from the world stage and become a parochial investor. To be sure, emerging markets are grappling with multiple crises, but the global diversification imperative applies to all geographic regions and countries. Underappreciated overseas investment destinations right now include South Korea, Vietnam, and Taiwan.
7) Add quality dividend stocks.
Dividend-paying stocks are proven tools for long-term wealth building, but they’re also safe harbors in rough seas because companies with robust and rising dividends also by definition sport the strongest fundamentals.
If a company has strong enough cash flow (and sufficiently low debt) to generate high and growing dividends, it also means that the balance sheet is inherently solid enough to sustain the company through the sort of uncertainty and volatility that bedevils investors today.
Questions about portfolio protection? I’m here to help: firstname.lastname@example.org
John Persinos is the managing editor of Investing Daily.