Unstoppable Trends and Hedges
08/31/2015 9:00 am EST
Panic is definitely creeping in and I'd be lying if I said I didn't feel the angst just like you do. You're not alone, counsels Keith Fitz-Gerald, editor of Total Wealth.
But here's the thing. Unlike most investors who are going to let panic take over, we know that the first step in building wealth is to take emotion out of the equation.
Most investors throw the word crash around like candy, without bothering to understand what it really means. Not surprisingly, they get caught up in the moment and make a slew of bad decisions as a result.
I’m not trying to make light of the situation. But even a few months of nasty market action is normal; you want the markets to periodically scare the weak money out for the simple reason that chaos always creates opportunity.
In building our portfolio, we focus on what we call “unstoppable trends.” These companies are backed by trends that are so powerful that nothing short of a meteor hitting the planet could derail them. They’re truly must haves.
Take American Water Works (AWK), for example. The company provides vital plumbing and water services to more than 15 million people in Canada and the United States, placing it squarely in line with the Unstoppable Trend Demographics.
Because the company’s products are almost completely unaffected by major economic downturns, it shouldn’t be surprising that the shares saw a mere 1.67% decline from June 2008 to early February 2009, even though the S&P 500 (SPX) (SPY) lost more than 40% of its value.
Or, consider Becton, Dickinson, and Co. (BDX), which saw just a 6.53% decline during this same period.
Because it sells medical supplies—including single-use supplies that keep demand for its products particularly robust—BDX kept its profits—and therefore its valuation—largely intact for its shareholders.
Sure, companies like these are going to come under pressure when everybody hits the sell button from time to time. To think otherwise is naive.
My point is that they’re going to be far more resilient and far more likely to come roaring back because short-term market disruptions do not interrupt the business case meriting your investment dollars.
Now let’s shift gears and talk about how to actually profit from the chaos that’s scaring the heebie-jeebies out of a lot of people at the moment.
Instead, try investing 3%-5% of your total investable assets in inverse exchange-traded funds because they appreciate even as the rest of the markets get carried to heck in a handbasket.
Inverse ETFs closely (but not perfectly) mirror the returns of what they track using a combination of short-selling, derivatives, and other leveraging tools.
What I love about inverse funds is that there are no options and no margin required to own them.
I’m also a big fan of these things because they can be used to hedge your portfolio not just when the markets crash, but ahead of time. Depending on your risk tolerance and objectives, the 1-to-1 inverse funds can make a great shock absorber for your core holdings.
For example, the Short S&P 500 (SH) negatively tracks the S&P 500. From October 2007 to February 2009, the fund returned 59%, while the overall markets saw their values drop by more than half.
Some inverse funds are leveraged 2- or even 3-to-1, which means that they’ll move 2 or 3 points for every single point the index they track drops.
The Market Vectors Double Short Euro ETN (DRR) is a two-times leveraged inverse ETF that tracks the performance of the Double Short Euro Index, minus investment fees.
And finally, there’s the ProShares Short FTSE China 50 (YXI). It’s a 1-to-1 fund that taps into the ongoing Chinese market madness.
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