After a stunning run higher through the first quarter, stocks saw a sharp pullback through the first six trading days in April. For investors trying to figure it all out, we are left wondering which way this market is going to turn next. Will we see more buying, or was the first week in April a harbinger of more selling to come?
Of course, the answer will only be known in retrospect, but one thing we do know is that markets do not go straight up forever. Another thing we know is that whether we are in a bull market or a bear market, our money is always susceptible to exogenous events and economic turmoil that can do serious damage to our wealth.
Perhaps now more than ever, there are very real threats to your money that have the potential to destroy much of your hard-earned wealth. The high probability of a recession in Europe; the potential collapse of the Eurozone; deflation and little to no real economic growth in the U.S.; inflation in necessary goods like food and energy; flash crashes in the stock market, and the pernicious and ongoing debasement of the U.S. dollar by the Federal Reserve all are very real threats to your wealth—especially if you aren’t prepared.
Fortunately, with a little preparation you can take steps to defend yourself against the threats facing your money. Here are five asset categories where you can focus.
1) Crisis Dividend Stocks
When a market crisis hits, you’ll want to own only the best of the best stocks. Certainly, these stocks can go down in value, but the stronger the company—and the stronger the dividend—the better able you’ll be to prevail in the crisis.
That’s why a great weapon to protect your wealth is what I call “Crisis Winner Companies” or CWCs. These are stocks that are leaders in safe, stable industries like companies in the consumer staples and defensive sectors. I’m talking here about the likes of Coca-Cola (NYSE:KO), Proctor & Gamble (NYSE:PG) and Phillip Morris (NYSE:PM) to name just a few.
These companies have been around for decades, and they’ve paid attractive dividends and offer attractive dividend yields. That means you still get paid to own these stalwarts even if a crisis ushers in an angry bear.
2) Crisis Corporate Bonds
The flipside of the CWC equity holdings is what I call CWC debt assets. These are the Crisis Winner Companies that issue corporate bonds. Here you want to own the highest rated, highest quality investment-grade bonds, as they offer extremely attractive yields, and are generally able to weather most types of market storms.
Companies such as AT&T (NYSE:T), Comcast (NASDAQ:CMCSA) and Wal-Mart (NYSE:WMT) all offer outstanding corporate bonds. Investors can get exposure to these and a variety of other top-flight corporate bonds via the iShares iBoxx $ Investment Grade Corp. Bond ETF (NYSE:LQD). The yield on this fund was 4.28% as of March 31, and over the past five years the fund has enjoyed a steady climb of 8.61%.
3) Gold and Silver
There’s no asset class more associated with safety in times of trouble than precious metals such as gold and silver. These metals have enjoyed a big surge in popularity over the past several years, as investors know that the Federal Reserve and other central banks around the globe keep printing money.
The result has been a decline in the value and purchasing power of the U.S. dollar and other fiat currencies. The other result has been a big flight of capital into ETFs such as the SPDR Gold Trust (NYSE:GLD) and the iShares Silver Trust (NYSE:SLV). Over the past five years, GLD has soared 140% while SLV has shined by 125%. If you want to own some truth in times of fiction, then gold and silver ETFs are a great choice.
4) Hedge ETFs
When the bulls are getting slaughtered by the bears, there’s no better place to take advantage of the carnage than with inverse ETFs. These are funds that move in the opposite direction of their respective benchmarks, and as such when a sector, broad market index, country or commodity market is plunging, you can exact your revenge with inverse ETF weapons.
There are a host of these funds available to investors, with some of the most popular being the Short S&P 500 (NYSE:SH), the leveraged ProShares UltraShort S&P 500 (NYSE:SDS) and the ProShares Short MSCI Emerging Markets (NYSE:EUM).
5) Cash
Money market funds, CDs, even currency funds such as the CurrencyShares Swiss Franc Trust (NYSE:FXF) represent safe havens for your money that can protect your wealth in times of turmoil. The dual goals when owning these funds is to 1) preserve your capital in the safest possible asset classes and stave off any market losses, and 2) preserve that capital until the smoke clears, and when all that remains is blood in the fiscal streets. It is at that point when you can come in and scoop up deals on battered assets that will be selling at ultra-deep discounts.
