“The more you sweat in peace, the less you bleed in war.” – Norman Schwarzkopf Jr.
I love this quote by General Schwarzkopf. It’s applicable to a lot of things in life, but especially investing. As a seasoned trader, I have seen a lot over the last 13 years—including the second-biggest swing in the stock market history in 2008/09.
If there was one thing that I have learned in these 13 years, is that when things are going well… really well… that’s the perfect time to start planning for the worst of times.
We are in one of these perfect times right now.
The stock market is near all-time highs and for the past seven years, we have seen nothing short of a miracle run with very little turbulence or major market pullbacks. To say that we are overdue is an understatement.
We have are approaching our 95th month since our last recession! The average time between recessions is 58 months. I am not the type of person who thinks they can predict the next big market crash, but I am a practical person and I know that markets go up… AND DOWN… It’s now not a matter of if, but when.
So the question is… are you prepared?
There are several schools of thought on the best way to protect your savings from a massive pullback or recession. Some say slowly divesting and moving to cash is the right answer. Others say to just wait it out and it will all be ok (I strongly disagree with this approach). My favorite, and I think the most logical, way to prepare yourself is by staying invested—just not with paper assets. Allow me to explain.
The entire investment universe can be broken down into two asset classes. Paper Assets and Tangible Assets. Stocks, bonds, ETFs, mortgages, notes, options, insurance, etc. are ALL PAPER ASSETS. Just think of all the stuff you cannot physically see or touch (besides the ‘paper’ contracts themselves).
Tangible Assets are everything you can touch and actually take physical ownership of your investment. Think houses, art, land, and commodities—including precious metals.
These two asset classes often have inverse relationships to one another. Meaning when one asset class goes up the other goes down. So of all the paper assets and all the tangible assets which one is the ‘best’ to protect your portfolio from the pending market correction?
Keep in mind that everyone’s portfolio is different and so are their investment objectives and you should ask your financial advisor which strategy would work best for you. With that being said, this is my go-to investment and what I believe is the ultimate insurance plan for your wealth.
Physical IRS-Approved Gold and Silver Coins.
Yes, gold and silver coins. Take a look at this comprehensive list of reasons for why gold is one of my favorite ways to protect my future.
Gold’s power for diversifying risk and smoothing returns comes from its unique mix of five key attributes:
- Non-correlation: Gold prices don’t tend to move in the same direction as other asset classes, helping reduce the impact of sharp losses elsewhere in a portfolio. Indeed, across a matrix of 17 major asset classes only the US Dollar, 3-month Treasury bills, US government bonds and corporate US debt show smaller week-to-week correlations with all the other assets than gold does over the last 5 years.
- Positive skew: Unlike the stock market, gold prices tend to rise faster than they fall. Coupled with its low-to-negative correlation, that means gold has worked quickly in the past to reduce the overall impact of sharp losses on other assets in a portfolio.
- Deeply liquid: Physical bullion is one of the deepest, most heavily traded asset classes. If it were a currency, it would represent the fourth largest FX pair in the world. Starting in Asia and ending in the US, trading runs almost 24 hours a day Monday to Friday. Live dealing on BullionVault continues all through the weekend as well.
- Global demand: Gold enjoys a uniquely wide and varied user-base worldwide, from investors to electronics manufacturers and central banks, with a series of seasonal events spurring consumer demand from engagements and weddings to Diwali, Christmas to Chinese New Year.
- No currency risk: While we tend to think of gold quoted in Dollars, it doesn’t rely on the US currency for any of its value. Instead, gold holds value against all currencies directly, making it highly useful for protecting against currency crisis or sharp inflation.
Of these five aspects, the one that stands out the most is gold’s tendency to be positively skewed. This makes this insurance policy unlike any other because as mentioned, unlike the stock market, gold prices rise faster than they fall.
What other investment can you think of that behave like gold?
We don’t need to look that far to see how fast the markets can turn against us. 2008’s decline wiped out years of growth in a matter of months. If you are not prepared when it happens again, you are likely to experience the same pain as before—if not more.
So to summarize Norman Schwarzkopf’s quote, it’s better to work hard to protect what you have when things are going well, than it is to find a bandaid when things are bad.
Owning physical gold is not a new concept, but one that is often looked when thinking about insuring your wealth for the long haul.
