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Steve's note: Regular readers know I'm bullish on U.S. stocks. And based on history, I believe we could see an extreme "blast off" in the markets – a "Melt Up." But you should always stick to your stops... and plan for the unexpected. Today, my colleague Kim Iskyan shares a few tips on how to be ready for anything.
Also, the markets will be closed on Monday for Martin Luther King Jr. Day. Look for your next issue of DailyWealth on Tuesday after the Weekend Edition.
Six Ways to Get Ready for the Next Crisis – Before It StrikesBy
Friday, January 12, 2018
Global stock markets keep heading higher and higher... credit markets are increasingly overextended... and geopolitics are more harrowing than ever.
Meanwhile, the MSCI All Country World Index (which reflects the performance of global stock markets) was up around 24% in 2017.
That's great news... But sooner or later, "mean reversion" says the good times have to end.
Mean reversion is the idea that markets (along with pretty much anything else in life) tend to reverse extreme movements over time – and gravitate back to average. It's like a rubber band... Stretch it, and when you let go, it returns to its original shape.
I've been saying for a while that markets around the world are "stretched" and could snap back to their "original shape" at any moment.
That means now is the time to prepare for whatever might happen... whether it's a market correction, a currency collapse, or something far worse.
So here are six easy things you can do right now to prepare yourself for a crisis... whether it's next week or next year.
No matter what – unless things turn really ugly – cash will get you what you need if your debit or credit cards don't work. But money in the bank won't do you any good if the banks go bust, or if the ATMs stop working. Keep enough cash in a home safe to get you by for a few weeks – or a few months, preferably.
Besides, given negative interest rates in much of the world, you might be better off earning zero interest under your own roof than negative interest with your bank.
Despite the best efforts of the U.S. Federal Reserve, the U.S. dollar is still the default global currency. Almost anywhere in the developing world (and in much of the rest of it), a $20 bill can fix a lot of problems – and a Ben Franklin can fix the rest of them. If you live outside the U.S. and your local currency is for some reason unavailable (like we've seen in many crises in emerging markets all around the world), or worthless (like we're seeing in Venezuela, today) – having greenbacks can be a lifesaver.
Diversifying where you bank is just as important as diversifying your portfolio. Keep some money in a "too big to fail" bank, which is safe – until it's allowed to fail, of course. Also keep some money in a conservative local lender where they know you by name. And remember: Just because your bank is covered by a national banking insurance entity doesn't mean you'll get any money when you need it. So you'd do well to have at least one account in a different country.
Don't assume that personal data and records that are online today – starting with bank or brokerage statements, for example – will be there when you need them tomorrow. Maybe it's a generational thing... but I trust the "cloud" to save my important stuff only if it's also saved on a hard drive tucked away somewhere. Important documents that are on someone else's website are available to you only as long as 1) that website is still up and running, and 2) the owner of the website gives you access to it.
So periodically download personal records... and store them someplace safe.
If you own stocks, you need to have a stop loss in mind for every stock you own (the lowest price at which you're willing to sell to limit your losses if a stock falls). Just as important, if a stock you hold hits your stop loss, sell. You can't make money by investing if you don't have money to invest. A stock that's down 50% has to double before you get back to breakeven. How often have you invested in a stock that's doubled? Probably not often enough to count on it. It's much better to have a stop loss level that's (say) 25% below where you bought the stock than to be out of the game. Or, even better, to use a trailing stop that follows the stock up as the share price rises.
History has proven time and again that gold is one of the best ways to hedge your portfolio – that is, to protect it when stock markets everywhere fall. For one thing, gold and stocks are negatively correlated assets. They tend to move in opposite directions. Second, people have used gold as a currency or medium of exchange for thousands of years. Meanwhile, other forms of money – livestock, shells, stones, and tulips – have come and gone.
Gold has withstood history and maintained its inherent value. It's durable, it's easy to transport, it looks the same everywhere, it's relatively easy to weigh and grade... It's the perfect store of value. In short, gold is insurance against financial calamity.
Even if you don't know what the next crisis is going to be, you can do your best to be ready for it. Get started with these six steps – today.
Good investing,
Kim Iskyan
Further Reading:
Stop losses are a great way to protect your portfolio. In this essay, Ben Morris explains how to choose a stop loss – and why it should be at the core of your trading plan. Learn more here: The Most Important Question You Need to Ask Yourself Today.
"I'll bet you've made this mistake," Dave Eifrig says. Diversifying your investments could save you in a crisis – but you must do it properly. Read more here: Investment Protection No One Is Talking About.
Market NotesTHIS APPAREL INNOVATOR OUTSHINES ITS RETAIL PEERS Another retailer is bucking sector-wide sales declines...
Regular readers know we've been watching the big shift to online retail. As more folks do their shopping on the Internet, many brick-and-mortar businesses have fallen into a downward spiral. But some traditional retailers are adapting... Earlier this week, we showed how electronics hub Best Buy (BBY) is defying the trend. Today, we'll highlight another survivor...
Athletic apparel company Lululemon Athletica (LULU) is known for its yoga attire, but it makes a range of sportswear. Lululemon is getting ahead by improving its online presence and providing good in-store experiences. It's also innovating products, like its fast-drying Everlux fabric. The company recently reported an excellent holiday season... And it boosted its outlook for the quarter, now expecting net revenue between $905 million and $915 million.
As you can see in the chart below, shares of Lululemon recently hit new 52-week highs. The stock is up more than 13% in the past year... And it has soared nearly 65% from its May low. If Lululemon continues to improve and innovate, the odds look good for this retailer...
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