hOW to Protect & hedge retirement portfolios
Regardless if you receive professional financial help for the majority of your retirement assets, or, you're a DIY investor picking stocks and index funds there are ways you can protect your portfolio when markets selloff which is cost effective and easy to implement.
What is hedging?
Before we begin showing examples of how to properly hedge out portfolios from down markets or overly volatile swings lets talk about what is hedging. In it's simplest definition hedging means using strategies or implementing asset classes that usually move in opposite directions to the overall stock markets. Here are just a few asset classes that historically exhibit non-correlated moves (opposite) of what stock markets do.
Commodities (inflation hedge)
Safe Haven Currencies (flight to quality)
Inverse Exchange Traded Funds
Fixed Income Strategies
Alts- Alternative Strategies
Defensive Options Strategies
We will briefly touch upon all of the above asset classes to discuss their merits and cons in determining if it's a right fit for protecting your portfolio in bear market cycles.
Before we get into the asset classes, let's look at a historical return stream of correlations between these investments compared to the broader stock markets below.
Commodities are used in portfolios typically when inflation is rising globally and growth is strong across the board. Or in the opposite spectrum when economies are deflating (shrinking growth) certain commodities like gold/Silver are used to protect when markets selloff usually. Let's look at the main commodities that exist in the world for investing.
If we look at when economies expand usually populations and industries consume more. For example, when times are good people tend to splurge on luxuries such as high quality meat, travel more causing energy prices to rise and companies build more causing construction material commodities to rise. In the opposite times when markets are selling off and people pare back their spending you see them buy more grains, travel less and companies pare back on spending on costly infrastructure projects. Makes sense right?
Softs- Cocoa, Cotton, Orange Juice, Coffee, Lumber, Sugar
Meats- Live Cattle, Feeder Cattle, Lean Hogs
Grains- Corn, Oats, Rough Rice, Soybeans etc.
Energy- Crude Oil, Gasoline, Natural Gas, Heating Oil etc.
Metals- Gold, Silver, Platinum, Palladium, Copper
Now as an everyday investor you won't even trade or invest in half of these commodities except maybe through proxy stocks such as gold miners, energy companies and industrial companies that build our infrastructure or construction for growth.
However, you can look to use ETF's to directly invest in these asset classes in order to get exposure if you believe we're entering an inflationary environment or deflationary environment
PROS & CONS
Most commodity ETF's are very illiquid the more niche you get. For example, if you were to invest in corn related ETF's you would see very low volume and daily trading activity. However, GLD or other ETF's that we trade on options here at Landshark Education are very liquid and offer a lot of opportunities to hedge a portfolio.
Pros of commodity investing are two-fold. First, if you believe that GDP and world economies are growing along with inflation the play would be going into - softs, energy and industrial metals (copper, steel etc)
When markets are selling off and we have deflation or bear cycles the commodities that historically outperform usually are- grains and precious metal (gold & silver)
So having a portion of your portfolio in commodities is a necessity to ride both expanding and contracting economies in order to achieve additional returns or hedge a heavy stock dependent portfolio.
To find out where to find ETF's to invest in commodities you can view a recent video Landshark Education did on finding ETF's to screen below.
A safe haven currency is a currency that investors and traders believe is stable enough to keep its value compared to other currencies in times of economic uncertainty, inflation and other forms of crisis. Generally, safe haven currencies are from countries that have very stable economies, so the currency does not change much in value.
In times of crisis, investors may seek to diversify their cash holdings away from their home county's currency to reduce the risk of losing wealth through depreciation in the currency. By storing their wealth in safe-haven currencies, an investor can cut down the risk of any single country seeing its currency sharply revalued. At the same time, traders try to read the moves in to and out of safe haven currencies in order to take up positions that profit from the buying and selling pressures these currency moves create.
Although the label of safe haven doesn't always apply, the U.S. dollar (USD), Japanese yen (JPY) and Swiss franc (CHF) are often considered to be safe haven currencies. You can see below in this 5 year chart what currencies have done compared to the S&P500 stock market index and notice certain times when stocks sold off these currencies act as a hedge and outperform. If you look at the crash of 2008 and the Tech Bubble you will see in more evident detail how well they hold up compared to overall stocks as well.
We will discuss part 2 and dive into other asset classes where you can completely hedge stock portfolios being an active do it yourself trader regardless of skill level. We also host regular classes and webinars to educate retirees and those looking to retire on how to manage their own money and become a do-it-yourself investor. Register for our next webinar below where we will be discussing how one of our students made $50K in the last two months with verified gains trading inside his retirement account and the steps he took to achieve this.
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