How to Protect Your Portfolio from the Next CrisisOkay, now I’m officially guilty of using a title as clickbait. If you are looking for me to tell you what will cause the next financial crisis and exactly how to position your portfolio to thrive in that environment, you should stop reading now. I can’t predict the future and have no precise solution. The truth is nobody can. If someone gets really precise about how the future will go, RUN AWAY!
I can tell you that there will be another financial crisis. That’s human nature. As a society we tend to get overly excited and misprice some major risks. Then we all freak out when the risk appears. The stock market drops in a big way and the newspapers (not sure if they will be around for the next crisis) talk about how the world is ending. Wash, rinse, repeat.
Each crisis is a little different though. Some cause inflation. Some cause deflation. Some only affect one country. Some spread around the world. Some pass in three months. Some last for a decade. Those differences cause big differences in how any one investment will behave. This underscores the importance of using an investment strategy that will allow you to succeed in a variety of scenarios.
Here are some basic ideas to help you prepare.
- Spread your stock market risk around the world. We don’t know what countries will be most affected by the next crisis.
- Own an appropriate amount of high quality short-term bonds. In a crisis people do tend to flock to the strongest things standing. High quality bonds have historically been one of the most reliable sources of stability in a portfolio. Yes, more reliable than gold.
- Have enough liquidity to ride out a multi-year downturn. You don’t want to sell stocks after they are down. In fact, you eventually want to use some of the money in high quality short-term bonds to buy more stocks when they are on sale.
- Maintain the right amount of balance between stocks and bonds to earn good stock market returns while they are available. Don’t get so caught up worrying about the next crisis that you forget that stocks go up 2/3rds of the time.
- Ignore any advice that requires specific predictions to come true in order for you to succeed. There were people who identified the mortgage meltdown ahead of time and predicted that the U.S. dollar would collapse because of it. They were right about the first part and dead wrong about the financial implications. I think that hurts twice as much.
If you have done those things, go enjoy the beautiful fall weather. It’s my favorite season here in Minnesota. If you need help with any of it, just ask.