The country is awash in optimism, and stocks are trading at all-time highs. Even a rate hike by the Federal Reserve couldn’t stop the bulls from running down Wall Street. So why am I playing the role of Cassandra and reminding you about places to run and hide during the next market crash?
I live in Southern California, and not too far from the San Andreas fault. That means at any time, I can be the victim of Earth’s tectonic caprice. Knowing this has prompted me to prepare, and that means I have emergency food, water, batteries, a generator and all sorts of other items I may need to ride out any loss of normal access to essentials.
When it comes to your money, you also need to be prepared.
Yes, the market continues to trade higher on the hope that the pro-growth policy prescriptions of President Donald Trump will be enacted by Congress. Hey, I’m optimistic about that too, and I’m personally long many “Trump-on” stocks and sectors.
Yet if “Trump on” morphs into “Trump off” due to policy disappointment, we could be in for an equity market earthquake capable of shaking your money to the core. That means now is the time to prepare, lay out your worst-case crash scenario strategy, and make sure you know all about the investment tools you can use if the optimism trade comes tumbling down.
Here are eight places to run and hide in a market crash.
Places to Hide in a Stock Market Crash: The Golden Safe Haven
This might seem like an exercise in the obvious, but if this market starts to correct and/or crash, then one of the best places to hunker down and ride out the aftershocks will be gold.
The yellow metal has proven its mettle as the metal of choice for investors seeking shelter from the storm, as gold has traditionally been viewed as one of the best, and most stable, stores of monetary value.
To get long gold, you can buy the physical metal via bullion, coins, jewelry, etc., but that’s not how I would play it. I prefer the modern way to get golden, and that’s via the SPDR Gold Trust (ETF) (NYSEARCA:GLD), an exchange-traded fund (ETF) pegged to the spot price of gold bullion.
Places to Hide in a Stock Market Crash: High-Quality Stocks
A rising tide is said to lift all boats, but the same is generally true for a falling tide, as it tends to take down all boats regardless of their seaworthiness. Still, high-quality stocks are always good to own, and by high quality, I’m talking about market dominators that are killing it in terms of revenue, earnings power, cash flow, cult-like customer loyalty or a product or service that has changed the way the world does things.
There are a lot of companies that fit this bill, but a few stalwarts that come to mind here are Apple Inc. (NASDAQ:AAPL), Amazon.com, Inc. (NASDAQ:AMZN), Celgene Corporation (NASDAQ:CELG) and Johnson & Johnson (NYSE:JNJ), but there are scores of high-quality stocks to put on your shopping list during a market crash.
Yes, these stocks will likely take a hit when the tide falls, but these sturdy vessels also will be the ones you want own at a discount for the next high tide … and there’s always a next high tide.
Places to Hide in a Stock Market Crash: Dividend-Paying ETFs
When equity values are crashing (remember 2008-2009?) things can be very scary. But if you’re a hearty investor intent on staying the course with your money, then why not do so while also getting paid to hold?
Income investors prepping for the retirement they deserve already know about the power of top dividend-paying stocks such as AT&T Inc. (NYSE:T), General Motors Company (NYSE:GM) and Merck & Co., Inc. (NYSE:MRK). And while owning these stocks is good, you can diversify your dividend-paying exposure with dividend-paying equity ETFs.
Two of my favorites are the Vanguard Dividend Appreciation ETF (NYSEARCA:VIG) and the iShares Select Dividend ETF (NYSEARCA:DVY). Both funds offer low-cost access to the biggest and arguably best large-cap dividend-paying stalwarts. If you’re looking to hide out during the next market crash, both funds represent a stout fortress.
Places to Hide in a Stock Market Crash: Alternative Investment Funds
So-called “alternative investments” offer investors exposure to all kinds sectors, but my criteria for an alternative investment is that it must not be directly correlated to the fate of stocks or bonds. And while all markets are generally connected to one another, there are some strategies designed to have very little direct correlation to markets.
Thanks to the burgeoning ETF industry, there are many funds that offer easy access to low-cost alternative investments such as managed futures, multistrategy funds and multiasset funds.
Three great alternative investment ETFs to put on your market crash list are the WisdomTree Managed Futures Strategy Fund (NYSEARCA:WDTI), SPDR SSGA Multi-Asset Real Return ETF (NYSEARCA:RLY) and the Morningstar Alternatives Solution ETF (BATS:ALTS).
Places to Hide in a Stock Market Crash: Consumer Staples ETFs
Crash or no crash, good times or bad, rain or shine, come hell or high water (you get the point), there are some things that people just have to do, and products that we have to have. These essentials are what Wall Street calls consumer staples. And when things get really tough economically, people will still need to brush their teeth, take showers and do laundry.
And, smokers will still need tobacco.
That means companies like The Procter & Gamble Co (NYSE:PG), Nestlé S.A. (OTCMKTS:NSRGF) and Altria Group, Inc. (NYSE:MO) will still sell a whole lot of product. And while you can own these individual names, perhaps a better way to own these and many other consumer staples is via ETFs.
Places to Hide in a Stock Market Crash: Inverse ETFs
Can’t just hang around waiting for the storm to pass? I totally understand your impatience. I can’t sit by idly and do nothing in the face of adversity either. It’s not in my nature. I prefer to fight back, throw punches … even tilt at windmills if I have to.
Fortunately, investing during a market crash is no quixotic undertaking, and that’s largely due to the many inverse ETFs available to investors today.
These are funds designed to move in the opposite direction of their respective indices. For example, you can short the S&P 500 index via the ProShares Short S&P500 (ETF) (NYSEARCA:SH). That fund hasn’t done very well in this bull market; however, in 2008 SH was up nearly 40%. That’s the power of a well-played inverse ETF during tough times.
More aggressive short plays using inverse ETFs include those that employ leverage, such as the ProShares UltraShort S&P500 (ETF) (NYSEARCA:SDS), which is designed to move twice the inverse of the S&P 500.
Places to Hide in a Stock Market Crash: Volatility Products
Market volatility is as low as it has been in many years, as traders have basically said they aren’t worried about this market. Yet when the next big pullback/correction/crash hits, the volatility is likely to strike out like a coiled rattlesnake.
Fortunately, there’s an ETF that allows us to buy volatility, and it’s the iPath S&P 500 VIX Short Term Futures ETN (NYSEARCA:VXX). This fund gives investors exposure to the S&P 500 VIX Short-Term Futures Index Total Return, which basically measures market volatility through CBOE Volatility Index futures.
Interestingly, investors have been buying VXX despite its recent underperformance (down about 39% year to date), as fund inflows have boosted the number of shares outstanding to record levels. So, it seems like there are some smart contrarians now locking in bets at what has been historically low volatility levels.
Places to Hide in a Stock Market Crash: Cash is King
If you can keep your head when all about you are losing theirs, then you’re likely to come out a winner. And when all about you are losing their money, one sure way to keep your head is to be in cash.
Don’t forget that cash is an asset class. And while you won’t get rich from cash, you won’t go broke either. Remember, there is no law against just taking your bets off the table and hunkering down in a cash bunker. In fact, I think a big portion of your overall portfolio should be in cash during a crisis.
Holding cash will help you sleep better at night, and it will leave you prepared to sift through the detritus of low-priced equities left smoldering from a market meltdown.
Along with plenty of dried food, purified water and plenty of ammunition, as of this writing Jim Woods also was long AMZN, DVY, MO. For more of his ETF and equity picks, please check out his Successful ETF Investing and Millionaire Blueprint advisory services.