This article is reprinted with permission NextAvenue.org,
One of my favorite folk tales revolves around a landowner who works in a farm. In their first meeting, the applicant explained his qualifications by saying “I can sleep through a storm”. A week later, a violent storm knocked across the area and the farmer tried in vain to wake the field hand. The next day, the farmer found that the shutters were closed, the equipment was securely stored, the wheat was tied up and wrapped, the barn was closed and the animals were calm with plenty of food. Suddenly the farmer understood the words of the young man: “I can sleep through a storm.”
He had prepared ahead of time and could sleep peacefully during the storm. Getting good sleep is another investment goal and with the right preparation it becomes easy. (The first goal is not to make money and the third goal is to make money.)
By taking the right precautions now, you can sleep soundly when the stock market falls sharply and remains there for some time, which is bound to happen for some time.
“The adage is the Wiley E. Coyote moment ahead,” says James Athe, investment director at Aberdeen Standard Investments in London, referring to the fast roadrunner, who looks down to see that he has run off a cliff. Realizing that he no longer has land, he falls further.
What is behind the fear of a fall in the stock market?
Stock market volatility, due to a number of factors, including inflation, interest rates and supply chain problems, raises fears of an impending market correction (that is, a fall of more than 10% but less than 20% in stock prices). Or even an accident (sudden and sharp fall).
Deutsche Bank says risk of ‘hard’ stock-market valuation correction rising – here’s why
The markets (and by extension investors) suffered a terrible day on Wednesday, December 1, when the Dow Jones Industrial Average (DJIA),
dropped 652 points, or 1.9%. s&p 500 spx,
Closed down 1.2%, its worst one-day drop since mid-May. Shares fell sharply again in mid-December. But the S&P 500’s total return for 2021 was impressive — about 25%.
Preparing for a reform begins with understanding the inevitability of small-sized reforms and the low likelihood of a big one, says Alex Klingelhofer, a financial advisor at Oklahoma City-based Accentual Wealth Advisors.
,An improvement is always around the corner,” he noted. “Typically, we have a garden-variety revamp once every 18 months.” Deep improvements happen less often.
“The thing that keeps people awake at night is big. There have been seven major improvements of more than 20% in the past 100 years,” Klingelhofer says. They were in 1929, 1937, 1939, 1946, 1973, 2000 and 2007.
See: This Veteran Analyst Hears the Echoes of the 1929 Crash in Today’s Stock Market
best hedge for investors
Diversification is the best defense. This means that your portfolio should contain enough cash and bonds to cover all possible expenses for five years. This means that the short income generated by those assets was liquidated by a correction against selling the stock to close.
The current 1.21% interest rate on five-year Treasury bills is “a terrible rate,” says Klingelhofer, but “if the market corrects and you have a 30% drop, your bills aren’t going to fall.”
SeeYour Portfolio Isn’t As Diversified As You Think, Unless You’re Using This Powerful Strategy
Stable sources of income such as salaries, pensions and Social Security can reduce the total amount you want in cash and near-cash holdings as protection against stock market collapse.
It also helps to own stocks in international markets that may not fall as much as the US market during a correction.
Emerging markets in Brazil, Russia, China and India, which have lagged the US by more than a decade, do not all move in the same direction at the same time.
The real growth in the world economy is coming from these sectors and they can provide opportunities and ballast for US-focused portfolios, especially when US markets perform poorly.
Precious metals like gold and investments in real estate can also provide some assurance. “They’re not making any more land,” Klingelhofer says.
He is also in favor of investing some money in a basket of commodities including wheat, corn and wood.
“These are things we use and need to live on,” he says, adding that they have little to do with the overall stock market. You can invest in commodities through commodity exchange-traded funds or ETFs.
as well 10 things you should know about diversification
Investors may have some time (though not unlimited time) to implement these strategies, as a major improvement can occur in six to 12 months, according to Athe.
Al Amid writes about personal finance and business in articles and books. He also produces the financial podcast, “Intensive Investing with Gavin Graham.”
This article is reprinted with permission NextAvenue.org, © 2022 Twin Cities Public Television, Inc. All rights reserved.
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