I’m not predicting the Dow is about to fall tomorrow. One of these days, though, the stock market won’t be as friendly to investors as it has been since March 2009. We’ll go through a year or two of flat, perhaps declining, share prices. When that happens, I don’t want to be sitting there wringing my hands, do you?
There are plenty of defensive measures you can take even now. For starters, you can bulk up your fixed-income stake and shift your equity position toward dividend-paying stocks. Beyond those steps, however, I encourage you to explore investments that build wealth independently of stock market trends.
Some assets that used to exhibit strong independence from Wall Street have become increasingly correlated with the major equity indexes in recent quarters — precious metals, for example. Thus, while I think it still makes sense to own some gold, silver or platinum bullion as a disaster hedge, you shouldn’t count on these investments to provide complete protection in the event of a fairly deep bear market — where the Dow tumbles, say, 20%-30% in the space of a year.
Instead, I advise you to stretch your imagination a little further. Here are three alternative investments to make money even if storm clouds rise over Lower Manhattan.
#1: Treasuries for Insurance
Longtime readers of my Profitable Investing advisory service know I’ve been cool to Treasury bonds for quite a while now. Viewed from the perspective of the next 10 or 20 years, yields are way too low for a government that has run up $16 trillion of debt — not to mention as much as $120 trillion in unacknowledged, unfunded liabilities for things like Social Security and Medicare, according to U.S. Debt Clock.
At some point, global investors will wake up and realize that Uncle Sam’s credit is far less sturdy than any ratings agency currently recognizes. Still, for now, it seems likely that the crowd will keep flocking to Treasury paper whenever the stock market hits a bump. Accordingly, I’m willing to “rent” Treasuries periodically, on a temporary basis, as long as the insurance isn’t outrageously overpriced.
How do you decide when to climb aboard? Watch the price of an exchange-traded Treasury fund that concentrates on longer maturities, iShares Barclays 20+ Year Treasury Bond (NYSE:TLT). Specifically, I’m targeting the fund’s 200-day average price, which recently stood just above $119. Over the past few years, TLT has repeatedly kissed its 200-day moving average, or modestly undercut it, before bobbing up again. You can track the 200DMA at StockCharts.
#2: Managed Futures
A second independent profit source is with managed futures. Managed (as opposed to passive) commodity accounts can take either a long (buying) or short (selling) position in futures contracts. Thus, if the manager’s trading system concludes that stock indexes are likely to go down while corn is headed up, the account can buy corn and sell the S&P 500 short.
Typically, during periods when most financial markets are chopping back and forth, futures accounts find it hard to make much headway. When clear-cut trends start to lock in, though, it’s not unusual for a managed account (or a futures fund) to rack up double-digit returns in one quarter or less.
Bob Condon and Jerry Kohn at Foundation Investment Group in Berkeley, California (800-899-8779) specialize in connecting investors with leading futures managers. In general, you should expect to have at least $250,000 in net worth to qualify for a managed account. Alternatively, you may be able to meet certain standards for combined income and net worth. Account minimums usually start at $10,000.
If you prefer the liquidity and visibility of a mutual fund, you might consider Mutual Hedge Frontier Legends Fund (MUTF:MHFCX), a multimanager futures fund with the flexibility to go long or short, depending on market conditions. There’s no up-front sales charge for the Class C shares, and the 1% redemption fee vanishes after 30 days. The minimum to open an account is $2,500.
Year to date through the end of August, MHFCX has garnered an unexceptional 0.51% return. However, the fund’s performance could get a lot more exciting in a hurry if market volatility picks up. That’s exactly when you would want to own an investment, like MHFCX, that marches to its own beat.
What to do now: For a prospectus, call 877-837-0600 or visit www.mutualhedge.com. Since few discount brokers offer MHFCX, I recommend buying directly from the distributor. No price limit.
#3: Business Development Companies
Barrels of ink have been spilled over Mitt Romney’s fabulously successful career in private equity. I don’t advise you to try to take your money to Bain Capital — they don’t want it. However, I’ve found another vehicle that combines the upside potential of private equity with the generous here-and-now yields of a middle-market lender.
FS Energy & Power Fund is a non-publicly-traded business development company managed by a subsidiary of the Blackstone Group (NYSE:BX), one of America’s top private-equity firms. The fund may eventually seek a public listing, but probably not for several years. FESP will earmark about 75% of its assets for loans to private energy-related companies (oil and gas production, pipelines, refineries, electricity generation, etc.) and about 25% for equity stakes in such companies.
Thanks to the fund’s income tilt, you’ll pull down a cash yield of around 6% (in monthly distributions) at FSEP’s current offering price of $10.10 per share. That’s your cushion if the economy and stock market run into rough weather. Should the skies clear, the equity portion of the portfolio will give you a shot at sizable capital gains.
What to do now: For literature on FSEP, call Bob Condon or Jerry Kohn at 800-899-8779. The minimum to open an account is $5,000.