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How to Build a Portfolio That Will Survive Any CrisisBy
Wednesday, February 19, 2014
Since 2008, my readers have made a fortune using the "glass-half-full" investment approach.
I've urged readers of my Retirement Millionaire advisory to invest in the U.S. through stocks, real estate, and municipal bonds.
I've repeatedly highlighted (with essays like this and this) that the U.S. economy isn't booming... but it's doing well enough to reward investors.
The results have been spectacular. They helped Retirement Millionaire subscribers earn 20.8% over the past two years alone.
As crazy as it sounds, it's unconventional to take the glass-half-full approach. So many people were burned by the 2008 crisis that they can't believe things are actually improving.
But here's the thing...
Investing with a "glass half full" approach doesn't mean you have to take on lots of risk. It doesn't mean you have to be exposed to all of the potential problems you hear about... like a recession... or emerging-market turmoil... or major economic problems in China.
In over 30 years of investing – both as a private investor and during my time at top Wall Street investment bank Goldman Sachs – I've noticed many investors make the big mistake of becoming "wedded" to one way of looking at the world.
Too many people make "all-or-nothing" bets with one belief in mind...
For example, you have "doom and gloom" investors who believe the world is about to enter a Depression. These people won't buy stocks or bonds because they think the world is about to go bankrupt. Their preferred investment allocation is often "gold and guns."
On the other hand, you have investors who go way overboard in the other direction. They put all of their money into stocks... or they put their whole retirement account in the stock of the company they work for. If that company goes bankrupt, those folks lose it all. Employees of Enron and Worldcom learned this lesson.
You simply don't have to make all-or-nothing bets.
You can design your portfolio to handle all kinds of market environments.
For years, my job at Goldman Sachs was to develop hedging strategies for wealthy clients and corporations. The goal with these strategies was to protect people and companies from unforeseen events.
During those years, I learned how wealthy, successful investors almost always own plenty of hedges and insurance. They consider what could happen in worst-case scenarios and take steps to protect themselves.
Many unsuccessful investors live with "blinders" on. They put too much money into one idea. They don't consider exit strategies. They don't own much insurance against infrequent, but significant events. This leads them to take huge risks that can wipe out half – or more – of their retirement accounts.
Although our readers have made a fortune with our ideas, it's important to consider unlikely events that could rattle the markets. It's important to know what kind of things we should insure against...
Could the U.S. dollar drastically fall in value? Sure... but it's unlikely.
Could China suffer a big economic slowdown? Sure... but it's unlikely.
Could there be another major terrorist attack against the U.S.? Sure... but it's unlikely.
I can't tell if any of these things will happen.
I can't tell you they won't.
I don't need to.
I just need to stick to an "all-weather" investment approach that includes safe, blue-chip stocks... some cash in reserve to take advantage of bargains... safe municipal bonds... and an allocation to gold or silver as wealth insurance. For most people, around 3%-5% of your portfolio allocated to that kind of insurance makes sense.
I'm still investing with the glass-half-full approach. I'm still more optimistic about U.S. investments than most anyone else. But I stay diversified for safety. And just like I own car insurance and hope to never have to use it, I own gold and silver and hope to never have to use them.
With this in mind, you can be ready for whatever the world throws at you in 2014.
Here's to our health, wealth, and a great retirement,
Dr. David Eifrig
Further Reading:
Doc encourages investors not to see the recent market decline as a reason to panic... but as a great opportunity to buy safe companies at cheap prices... "I don't think these discounts will last very long," he says. "Take advantage of the fear and buy world-class businesses while they're still cheap..." Get all the details here.
If you're building a portfolio for the first time, Doc recently shared his advice for getting started... "It doesn't take a lot of experience or money to start investing," he writes. "You can start with as little as $25 a month to work your way to financial independence." Learn more in Doc's two-part series here and here.
Market NotesIS THE SMALL-RESOURCE STOCK BUST OVER? After more than two years of suffering, small-resource stocks may have finally found a bottom...
Regular DailyWealth readers know we keep a close eye on small-resource stocks. This sector is one of the biggest "boom and bust" areas of the market. It can enjoy spectacular booms that send its members 500%... or 1,000% higher. It can also suffer spectacular busts that produce 90%-plus losses. This is not a market to invest the rent money in.
Since early 2011, it has been all "bust" for small-resource stocks. Gold prices have fallen... and investors fled the sector. The benchmark S&P/TSX Venture Index fell from its 2011 high of 2,400 to its 2013 low of 860 (a drop of 64%). But as you can see from today's chart, this market might be carving out a bottom...
Since bottoming in the 850-900 area, the Venture Index has put in a short series of "higher highs and higher lows." Just last week, the index reached a 10-month high around 996. It looks like "bust mode" is over. Traders should consider looking through the wreckage for long ideas.
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