The first three-quarters of the year are on the books, and if you’ve been long equities in 2012, you’re probably sitting on more than a few strong winners. Stocks in the S&P 500 are up nearly 15% year-to-date through the first nine months, but how we got to these stellar gains has been anything but a steady climb.
The year started out strong, with optimistic buying through the first quarter. Then we saw a pronounced decline during the second quarter that really got ugly in May. In June, stocks staged a central bank rally, as rumblings that more stimulus from the Federal Reserve and the European Central Bank (ECB) were coming to the rescue. It took a few months, but in September that central bank speculation became a reality, first with the ECB instituting a bond-buying program, and then the Fed coming through with more quantitative easing for an “unlimited” period.
So, now that the Fed and the ECB have made their intentions known, what’s next for stocks? Will there continue to be more buying? Will there be a post-election bounce and/or a Santa Claus rally? Or, has this market topped, and are we headed for a post-election selloff and some fear-induced “fiscal cliff” selling?
Of course, we’ll only know the answers with the benefit of hindsight, but one thing we do know is that markets do not go straight up without a significant pullback for very long. Certainly that hasn’t been the case in stocks over the past several years. More importantly, 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 fiscal 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. A protracted recession in Europe that can’t be salvaged by the ECB; a lack of any real economic growth in the U.S. that can’t be backstopped by the Fed; a sinking Chinese economy; flash crashes in the stock market, and the ongoing central bank debasement of the U.S. dollar all are very real threats to your wealth — especially if you aren’t prepared to deal with the downside.
Fortunately, with a little preparation you can take steps to defend yourself against the threats facing your money. Here are five ways to make sure your wealth is protected regardless of market circumstances.
1) Crisis Winning Stocks
When, and not just if, a market crisis hits, you’ll want to own only the best of the best stocks. Certainly, these stocks can go down in value in times of peril, 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 Altria (NYSE:MO), Coca-Cola (NYSE:KO) and Procter & Gamble (NYSE:PG), to name just a few. These companies have been around for decades, and they’ve paid consistent dividends and offer attractive dividend yields. That means you still get paid to own these stalwarts even if a crisis ushers in a major selloff.
2) Crisis Winning 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).
3) Precious Metals
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, the ECB and other central banks around the globe are going to continue their money-printing schemes.
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 135% while SLV has shined by more than 150%. 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. Some of the most popular are the ProShares Short S&P 500 (NYSE:SH), the leveraged ProShares UltraShort S&P 500 (NYSE:SDS) and the ProShares Short MSCI Emerging Markets (NYSE:EUM).
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
- preserve your capital in the safest possible asset classes and stave off any market losses, and
- 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.