How to invest in a dangerous world?
Over the last two weeks my phone has been busy speaking to clients on how they should approach investing with the geo-political chaos surrounding us. With the failed coup in Turkey, the latest ISIS terrorist attack in Nice and what seems like the breakdown of law and order in the US with police being shot, investors are getting nervous. Throw into the mix a slowing US economy, and the “Brexit” and it’s understandable why they are jittery.
What to do?
My advice: Do nothing. Just stay the course and follow the investment plan that you have created. The world has always been a very dangerous place. Pundits have always been calling for market crashes, and most of the time the market moves higher. I have had many clients over the years that try and maneuver their portfolios based on political events and how the anticipated events would play out. More than once the client was correct in the prediction but the portfolio used to try and profit from the events dropped anyway.
Let’s look at the US market as a perfect example. With all the aforementioned issues common wisdom would have predicted a huge market drop. Well, the opposite actually occurred. The stock market and dollar continued to move higher. The exact opposite of what any sane person would have thought to be the outcome. Market crashes generally happen without warning, and are not usually telegraphed.
Market crashes generally happen without warning, and are not usually telegraphed.
Retirement investors
While I believe that most investors should just stay the course and do nothing, retirees are different. For retirement investors that don’t have a large net-worth and can’t afford the possibility of a 20-30 percent loss, pragmatism should win out. For these investors, we may be entering a period of time where capital preservation takes precedence over capital appreciation and they should make some changes in the way their portfolio is allocated. I say this for two reasons. 1 – They don’t have the luxury of time on their side and the ability to rebuild their wealth in the event of a market drop and 2 – because the most important aspect to investing is being able to sleep well at night and not be nervous that a sudden market drop will wipe out your savings.
For these investors it pays to lower stock exposure. If you are worried that the cumulative effect of all these events portend an imminent market crash, than just sit in cash, and take a wait-and-see attitude. I don’t believe that it is necessary to try and profit from a potential market drop, because if you are wrong, you are going to lose money, and that’s precisely why you sold your stocks in the first place. No need to be a pig, just have some patience and then re-invest.
It will drop
Let’s say you disagree. Now what? For those investors hellbent on trying to time a major market drop and profit from it, the classic way to play a market drop is by buying ‘put’ options. A ‘put’ is an option contract giving the owner the right, but not the obligation, to sell a specified amount of an underlying security at a specified price within a specified time. A ‘put’ option is basically a bet that the market will drop. If it does, the investor makes money. If wrong, the initial investment in the put is lost.
Options can be quite complicated, and should be understood before being used. If you are worried about a market decline, speak with your financial adviser to coordinate how best to position your portfolio.
The information contained in this article reflects the opinion of the author and not necessarily the opinion of Portfolio Resources Group, Inc. or its affiliates.
Aaron Katsman is a licensed financial professional in Israel and the United States who helps people with US investment accounts. He is the author of the book Retirement GPS: How to Navigate Your Way to A Secure Financial Future with Global Investing.