VISION WEEK
REPORT 2 by the Mauldin
Economics Team
Economics Team
Bulletproof Your Portfolio
Time-Tested Strategies
to Protect Your Assets
to Protect Your Assets
In our previous special report,
The Perfect Financial Storm?, we learned that the global economy is facing
major risks. Its growth is constrained by macro forces that won’t reverse
anytime soon.
The Perfect Financial Storm?, we learned that the global economy is facing
major risks. Its growth is constrained by macro forces that won’t reverse
anytime soon.
And as all of our editors
agreed, a breakdown is inevitable within the next few years.
agreed, a breakdown is inevitable within the next few years.
Our survey revealed that most of
you have been investing for over 16 years. That means you have experienced a rise and fall of the market first-hand.
This time will likely be no different. The only question is how will it
start and how bad will it be?
you have been investing for over 16 years. That means you have experienced a rise and fall of the market first-hand.
This time will likely be no different. The only question is how will it
start and how bad will it be?
Given the amount of central bank
interference and financial engineering we’ve seen since 2008, the downside risk is enormous.
interference and financial engineering we’ve seen since 2008, the downside risk is enormous.
As Kevin Brekke, editor of
Rational Bear, pointed out, equities
lost around 83% of their value in the Great
Depression. We can’t rule out a repeat.
Rational Bear, pointed out, equities
lost around 83% of their value in the Great
Depression. We can’t rule out a repeat.
If you haven’t bulletproofed
your portfolio for the coming recession yet, there is still time to take
action... but we recommend you get started now.
your portfolio for the coming recession yet, there is still time to take
action... but we recommend you get started now.
In the second report of our
“Vision Week” series, the Mauldin editors walk you through their best
strategies for preserving—and even growing—your capital as we approach what
could be the next big crisis.
“Vision Week” series, the Mauldin editors walk you through their best
strategies for preserving—and even growing—your capital as we approach what
could be the next big crisis.
Before we get to that, let’s
look at your responses in the reader survey...
look at your responses in the reader survey...
The Troubling Truth:
Most Investors Don’t Have Any
Portfolio Insurance
Portfolio Insurance
In the survey, we asked if you
use any type of portfolio insurance or hedging to mitigate risk in a financial
downturn. The majority of you—in fact, more than 71%—said that you haven’t
hedged your portfolio in any way.
use any type of portfolio insurance or hedging to mitigate risk in a financial
downturn. The majority of you—in fact, more than 71%—said that you haven’t
hedged your portfolio in any way.
Only 22% of you were confident
that your portfolio would hold up well in the next recession.
that your portfolio would hold up well in the next recession.
Hedging is key to successful and sustainable investing. Yet, as the
survey has shown, few investors use any hedging strategies, which puts their
wealth in real danger.
survey has shown, few investors use any hedging strategies, which puts their
wealth in real danger.
So we asked our editors to share
what they do to preserve their capital and hedge against the biggest
risks they see today.
what they do to preserve their capital and hedge against the biggest
risks they see today.
Here’s what they had to say.
Our Editors Reveal the Best Strategies to
Hedge Today’s Risks...
Hedge Today’s Risks...
Kevin Brekke, editor of Rational Bear:In the Great Depression, the
S&P 500 lost 83% of its value between 1930 and 1932—and it wasn’t a one-act
play. There were seven other declines of at least 26% between 1929 and 1939.
S&P 500 lost 83% of its value between 1930 and 1932—and it wasn’t a one-act
play. There were seven other declines of at least 26% between 1929 and 1939.
Even if you exclude the Great
Depression, the S&P 500 has had 12 bear markets. That averages out to a 20%
decline in stocks about every 6.5 years.
Depression, the S&P 500 has had 12 bear markets. That averages out to a 20%
decline in stocks about every 6.5 years.
Since the Financial Crisis,
we’ve had some market scares with four corrections greater than 10%. But the
S&P 500’s 56.8% drop between 2007 and 2009 was the last bear market in US
stocks.
we’ve had some market scares with four corrections greater than 10%. But the
S&P 500’s 56.8% drop between 2007 and 2009 was the last bear market in US
stocks.
So historically speaking, we’re
overdue for another bear market. This bull market isn’t going to simply die of
old age. The older it gets, the more crucial it is to have insurance.
overdue for another bear market. This bull market isn’t going to simply die of
old age. The older it gets, the more crucial it is to have insurance.
And the simplest way to hedge
against a stock market crash is to buy put
options.
against a stock market crash is to buy put
options.
Ideally, your option insurance
should only put a 1% drag on your annual returns. In reality, it will cost
more.
should only put a 1% drag on your annual returns. In reality, it will cost
more.
However, the larger the market
correction, the more valuable these options will become, and the greater your
insurance payoff. As I always say, being underinsured beats no insurance at
all.
correction, the more valuable these options will become, and the greater your
insurance payoff. As I always say, being underinsured beats no insurance at
all.
If your portfolio loses 10–20%
during a 50% market decline, that would be a big win.
during a 50% market decline, that would be a big win.
Consider it just like paying
your deductible. You might take a loss, but you preserved plenty of capital to
rebuild your portfolio. The key is not to wait until a financial crisis unfolds
to buy portfolio insurance. Always buy insurance before you need it.
your deductible. You might take a loss, but you preserved plenty of capital to
rebuild your portfolio. The key is not to wait until a financial crisis unfolds
to buy portfolio insurance. Always buy insurance before you need it.
Robert Ross, editor of In the Money and Yield Shark:I use two strategies to preserve
my portfolio in this environment.
my portfolio in this environment.
First, I invest in undervalued all-weather stocks. Also
known as counter-cyclical or defensive stocks, these companies have stable,
predictable cash flows, which allows them to outperform their counterparts in
an economic crisis.
known as counter-cyclical or defensive stocks, these companies have stable,
predictable cash flows, which allows them to outperform their counterparts in
an economic crisis.
I also make sure that the
stock pays a sustainable dividend of 2.0% or higher. During a market
downturn, dividend-paying stocks tend to be less volatile than stocks with no
dividends. That’s a big draw for investors, especially when all hell breaks
loose in the markets.
stock pays a sustainable dividend of 2.0% or higher. During a market
downturn, dividend-paying stocks tend to be less volatile than stocks with no
dividends. That’s a big draw for investors, especially when all hell breaks
loose in the markets.
That’s the reason
dividend-paying stocks make up a lot of my Yield Shark portfolio.
dividend-paying stocks make up a lot of my Yield Shark portfolio.
There is a lot of data to
support this strategy. All you need to do is look at the performance of the Dividend Aristocrats (NOBL), a list of
S&P 500 companies that have increased their dividends every year for over
25 years.
support this strategy. All you need to do is look at the performance of the Dividend Aristocrats (NOBL), a list of
S&P 500 companies that have increased their dividends every year for over
25 years.
Between 2005 and 2015—a period
that includes the Global Financial Crisis—Dividend Aristocrats stocks earned
investors an annualized return of 10.3%, while the S&P 500 returned 7.3%.
that includes the Global Financial Crisis—Dividend Aristocrats stocks earned
investors an annualized return of 10.3%, while the S&P 500 returned 7.3%.
More importantly, Dividend Aristocrats
returned those double-digit gains with less volatility than the S&P 500
index.
returned those double-digit gains with less volatility than the S&P 500
index.
The other strategy I use—and
I’ll second Kevin Brekke here—is put
options or put writing.
I’ll second Kevin Brekke here—is put
options or put writing.
The great thing about put writing is that you earn income
on companies you want to own without exposing yourself to the downside risk in
case of a correction.
on companies you want to own without exposing yourself to the downside risk in
case of a correction.
If the stock falls in
your buy range (i.e., is below your strike price), you get to buy it at your
desired entry price. If the stock doesn’t fall in your buy range (i.e., is
above your strike price), you get to keep the option income with no further
obligations.
your buy range (i.e., is below your strike price), you get to buy it at your
desired entry price. If the stock doesn’t fall in your buy range (i.e., is
above your strike price), you get to keep the option income with no further
obligations.
This is what I call the “Heads
you win, tails you win” strategy.
you win, tails you win” strategy.
And this strategy pays off. In
the last 12 months, my Macro Growth & Income Alert subscribers have earned
over $3,000 using this strategy. Meanwhile, stocks in our portfolio have risen
on average 20.1%.
the last 12 months, my Macro Growth & Income Alert subscribers have earned
over $3,000 using this strategy. Meanwhile, stocks in our portfolio have risen
on average 20.1%.
These two strategies will help
you earn higher risk-adjusted returns with minimal volatility.
you earn higher risk-adjusted returns with minimal volatility.
Patrick Watson, co-editor of Over My Shoulder:I think we’re all in real danger
of a triple threat in the next year or two.
of a triple threat in the next year or two.
First, we’re overdue for a recession that will
probably be worse than the last one. People will lose their jobs and businesses
will lose revenue.
probably be worse than the last one. People will lose their jobs and businesses
will lose revenue.
Second, the recession will hit asset
prices, particularly stocks. That means your net worth could shrink at the same
time your income falls.
prices, particularly stocks. That means your net worth could shrink at the same
time your income falls.
Third, the government may
respond with higher taxes on whoever they define as “rich.” And the bar
will probably be low. Anybody with an investment portfolio could face a higher
tax bill.
respond with higher taxes on whoever they define as “rich.” And the bar
will probably be low. Anybody with an investment portfolio could face a higher
tax bill.
That last one will be hard to
escape, but we can do something about the other two.
escape, but we can do something about the other two.
It would be a good start to make
sure your job or business isn’t tied to the business cycle. You want your
income to be as recession-proof as possible.
sure your job or business isn’t tied to the business cycle. You want your
income to be as recession-proof as possible.
Then, allocate part of your
investment portfolio for capital
preservation, even if you are relatively young. This will give you
liquid assets you can draw on to replace any lost income and buy beaten-down
stocks, real estate, and other assets at bargain prices.
investment portfolio for capital
preservation, even if you are relatively young. This will give you
liquid assets you can draw on to replace any lost income and buy beaten-down
stocks, real estate, and other assets at bargain prices.
You can do that by building cash
and putting it in a Treasury-only money
market fund or bank account. You’ll earn a small return with no principal
risk—and you have daily liquidity.
and putting it in a Treasury-only money
market fund or bank account. You’ll earn a small return with no principal
risk—and you have daily liquidity.
An even better way to hoard cash
is to avoid funds and instead buy short-term Treasury bills or bank CDs
directly. You can “ladder” the
maturities and keep rolling them over, so you’ll be able to pull out cash at
regular intervals if you need it.
is to avoid funds and instead buy short-term Treasury bills or bank CDs
directly. You can “ladder” the
maturities and keep rolling them over, so you’ll be able to pull out cash at
regular intervals if you need it.
In the worst case, you might
face a small penalty, but you’ll probably make it up with higher yields. The
difference between an average money-market fund and a one-year CD can easily be
an extra 50–75 basis points, annualized.
face a small penalty, but you’ll probably make it up with higher yields. The
difference between an average money-market fund and a one-year CD can easily be
an extra 50–75 basis points, annualized.
Besides cash, another asset
class I highly recommend for capital preservation is precious metals. I think each investor should have at least a small
slice of their portfolio in physical gold or silver.
class I highly recommend for capital preservation is precious metals. I think each investor should have at least a small
slice of their portfolio in physical gold or silver.
Prices can bounce around, of
course. But history shows that precious metals are the best way to preserve
wealth in the toughest times. Just make sure you have secure storage
arrangements, whether in a safe at home or with a trusted custodian.
course. But history shows that precious metals are the best way to preserve
wealth in the toughest times. Just make sure you have secure storage
arrangements, whether in a safe at home or with a trusted custodian.
John Mauldin, co-editor of Over My Shoulder:As you’ve probably read in my
Train Crash series in Thoughts from the Frontline, I am very concerned about a
global debt crisis. I call it “The Great Reset.”
Train Crash series in Thoughts from the Frontline, I am very concerned about a
global debt crisis. I call it “The Great Reset.”
It will likely begin in the next
global recession and last until the late
2020s. At this point, I think it’s almost inevitable.
global recession and last until the late
2020s. At this point, I think it’s almost inevitable.
The world has more debt than it
can pay, and some of it must disappear in one way or another. The question is how,
when, and who will bear the losses.
can pay, and some of it must disappear in one way or another. The question is how,
when, and who will bear the losses.
The good news is that we will
probably be all right for another year or two. Markets could get volatile, but
the real fireworks are still far off in the distance. That means we have time
to prepare.
probably be all right for another year or two. Markets could get volatile, but
the real fireworks are still far off in the distance. That means we have time
to prepare.
I suggest doing two things with
this time.
this time.
The first one is to avoid corporate debt as much as
possible. The crisis will likely begin in high-yield bonds and leveraged
loans. You want to stay away from those asset classes or at least have your
finger on the trigger. The crash could unfold fast.
possible. The crisis will likely begin in high-yield bonds and leveraged
loans. You want to stay away from those asset classes or at least have your
finger on the trigger. The crash could unfold fast.
The other thing, as my colleague
Patrick Watson mentioned, is to build up
cash. Also, diversify your assets between trading strategies and,
eventually, even custodians.
Patrick Watson mentioned, is to build up
cash. Also, diversify your assets between trading strategies and,
eventually, even custodians.
At least 25% of my readers are
not based in the US, so we all have different circumstances and time horizons.
Wherever you are, you want to keep your money safe and accessible because I
think this crisis will give us some fabulous, once-in-a-lifetime buying
opportunities.
not based in the US, so we all have different circumstances and time horizons.
Wherever you are, you want to keep your money safe and accessible because I
think this crisis will give us some fabulous, once-in-a-lifetime buying
opportunities.
The world will not end. It will
just evolve and transform.
just evolve and transform.
Jared Dillian, editor of Street Freak, The Daily Dirtnap, and ETF20/20:
Here’s how I see the markets: US
equities are super expensive, emerging equities are kind of a mess, and credit
is way overpriced.
equities are super expensive, emerging equities are kind of a mess, and credit
is way overpriced.
So, the goal for this year is to
stay alive. You want to stay away from
risk, period. And here are the two best ways to do it: cash and bonds.
stay alive. You want to stay away from
risk, period. And here are the two best ways to do it: cash and bonds.
Look, when interest rates were near
zero for eight years, the Fed was telling you that you should go out and take
risk, which means buy equities.
zero for eight years, the Fed was telling you that you should go out and take
risk, which means buy equities.
Now the rates are coming back
up, which is their hint that you should stop taking risk. You should go into
T-bills instead. If the Fed hikes further, you’re looking at 4% returns for not
a lot of risk, which is not bad.
up, which is their hint that you should stop taking risk. You should go into
T-bills instead. If the Fed hikes further, you’re looking at 4% returns for not
a lot of risk, which is not bad.
This affects how everything in
the world is priced, and it’s going to change everyone’s risk preferences. This
is not a year to try to hit home runs. This is a year to try to pick up 4–7%
returns in fixed income and wait for big buying opportunities.
the world is priced, and it’s going to change everyone’s risk preferences. This
is not a year to try to hit home runs. This is a year to try to pick up 4–7%
returns in fixed income and wait for big buying opportunities.
Remember, the starting point of
your positions matters a lot. I started investing in 1998, and for the first
six or seven years, my performance was very poor. That’s because I basically
got into the stock market at the highs.
your positions matters a lot. I started investing in 1998, and for the first
six or seven years, my performance was very poor. That’s because I basically
got into the stock market at the highs.
Of course, I didn’t know what I
was doing at that time. And I’m not sure if I would have had the patience to
wait either. But my point is, where you are starting out matters.
was doing at that time. And I’m not sure if I would have had the patience to
wait either. But my point is, where you are starting out matters.
For that reason, I would not put
100% of my capital into the stock market as it stands right now. Instead, I
would average into it over a long period of time.
100% of my capital into the stock market as it stands right now. Instead, I
would average into it over a long period of time.
As for cash, who says you always
have to be fully invested? In fact, it’s just the opposite. I like to hold a
lot of cash anytime.
have to be fully invested? In fact, it’s just the opposite. I like to hold a
lot of cash anytime.
That’s because cash gives you an
option to buy something cheaper in the future.
option to buy something cheaper in the future.
There is nothing worse than
being fully invested in an overpriced market. When the market corrects, you are
trapped in your existing positions.
being fully invested in an overpriced market. When the market corrects, you are
trapped in your existing positions.
It’s always smart to have
cash—lots of cash. Many people look at cash as a drag on their returns. But for
me, cash means the freedom to grab those bargains later.
cash—lots of cash. Many people look at cash as a drag on their returns. But for
me, cash means the freedom to grab those bargains later.
And my guess is that things will
get cheaper soon.
get cheaper soon.
Patrick Cox, editor of Transformational Technology Alert:
I’ll be an outlier here and talk
about portfolio hedging from a demographic standpoint.
about portfolio hedging from a demographic standpoint.
Here’s the problem: Most people
don’t save enough money because they base their retirement on their parents’
lifespans.
don’t save enough money because they base their retirement on their parents’
lifespans.
But the economic reality has
changed. Our country is more indebted than ever, and government entitlements
are vastly underfunded.
changed. Our country is more indebted than ever, and government entitlements
are vastly underfunded.
Worse, as lifespans grow and
populations get older, the costs for social programs like Social Security and
Medicare are soaring to levels that governments aren’t able to cover.
populations get older, the costs for social programs like Social Security and
Medicare are soaring to levels that governments aren’t able to cover.
As a result, a perfect demographic storm is coming.
That’s why anti-aging
technologies must be part of your portfolio as a hedge against the coming
economic crisis stemming from this once-in-a-century demographic shift.
technologies must be part of your portfolio as a hedge against the coming
economic crisis stemming from this once-in-a-century demographic shift.
We’re nearing the breaking
point—and when we reach it, prolonged health will be the ultimate good. Nothing
will be more valuable.
point—and when we reach it, prolonged health will be the ultimate good. Nothing
will be more valuable.
As Jim Mellon, the visionary
entrepreneur and billionaire investor says, everyone on the planet is a
potential customer for anti-aging medicine.
entrepreneur and billionaire investor says, everyone on the planet is a
potential customer for anti-aging medicine.
The value of key players in this
field is so grossly underrated right now. I think they’re just going to sky-rocket.
field is so grossly underrated right now. I think they’re just going to sky-rocket.
Capturing the Best Risk-Adjusted
Returns
Returns
Hedging your portfolio provides
sustainable long-term returns, mitigates risk, and is a vital part of your
investment strategy.
sustainable long-term returns, mitigates risk, and is a vital part of your
investment strategy.
To have bulletproof protection
in place by the time we enter the Great Reset, we recommend you take action
now.
in place by the time we enter the Great Reset, we recommend you take action
now.
Here’s a short recap of what the
Mauldin editors suggested:
Mauldin editors suggested:
·
Use put options
Use put options
·
Invest in sustainable, dividend-paying stocks
Invest in sustainable, dividend-paying stocks
·
Hold assets that are not correlated to the stock
market, such as gold
Hold assets that are not correlated to the stock
market, such as gold
·
Build a cash position to be able to buy
beaten-down assets at bargain prices when markets correct
Build a cash position to be able to buy
beaten-down assets at bargain prices when markets correct
There’s no reason to panic,
though. As John Mauldin noted above, the crisis may take a few years to unfold,
so make sure to take advantage of rising stocks along the way.
though. As John Mauldin noted above, the crisis may take a few years to unfold,
so make sure to take advantage of rising stocks along the way.
In our final report, Capturing
the Upside, our editors reveal the sectors and asset classes they are currently
bullish on. Those are the investments that can give you the best risk-adjusted
returns and become an essential part of your portfolio in the coming years.
the Upside, our editors reveal the sectors and asset classes they are currently
bullish on. Those are the investments that can give you the best risk-adjusted
returns and become an essential part of your portfolio in the coming years.
Next week will be our “Action
Week,” with presentations by each of the editors—including actionable advice
and each editor’s favorite investment recommendation.
Week,” with presentations by each of the editors—including actionable advice
and each editor’s favorite investment recommendation.
Stay tuned!
Copyright © 2018 Mauldin
Economics
Economics
COMMENTS
Galynn Ferris • 4 hours ago
1) I believe the recent
observation that we will have credit cycles, not economic cycles, has been
under-appreciated.
observation that we will have credit cycles, not economic cycles, has been
under-appreciated.
2) DiMartino Booth's recent
newsletter stating that the value of IL
farmland is decreasing is a leading indicator IMHO. I believe that cash
rent on farmland parallels cash returns on long term treasuries. When the
interest on T bonds goes up, cash rent will go up or farmland values will go
down. Commodity prices have been depressed for several years putting pressure
on rents. The markets are indicating this will not change any time soon, so
asset values are declining. The farm crisis of 1980 redux.
newsletter stating that the value of IL
farmland is decreasing is a leading indicator IMHO. I believe that cash
rent on farmland parallels cash returns on long term treasuries. When the
interest on T bonds goes up, cash rent will go up or farmland values will go
down. Commodity prices have been depressed for several years putting pressure
on rents. The markets are indicating this will not change any time soon, so
asset values are declining. The farm crisis of 1980 redux.
Considering the high debt load
on all assets; we could easily see the same scenario in all markets. The
trigger everyone has been anticipating.
on all assets; we could easily see the same scenario in all markets. The
trigger everyone has been anticipating.
1
•Reply•Share ›
No comments:
Post a Comment