The most important idea in investing is to hold more than just stocks so a market crash doesn’t take your money with it.
While the stock market is still positive for the year (so far!), returns have definitely slowed down. Investors love to pretend that a stock crash is still years away, but the next crisis may not be that far away.
The market plunged in February for the fastest drop in years and, at one point, wiped out more than 10% of investor wealth. Stocks have clawed back most of the losses but the S&P 500 is still less than 1% higher on the year.
We haven’t had a bear market in a decade, even though it’s happened about every six years in the 40 years to 2008. We haven’t had a drop of 5% or more in stocks for three years, even though that’s happened on average every two years for the last five decades.
In this special video I’ll show you why the stock market has been on edge lately, the two primary reasons stocks could be in for a major crash, as well as one reason that nobody could see coming.
I’ll also be sharing five investments I’m using in my personal portfolio to protect my money and grow my nest egg even if the rest of the market collapses. These five investments don’t move in lock-step with stocks so it could be the opportunity you need to save your portfolio from the coming panic.
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History of Stock Market Cycles
Today’s video is something that’s always on investors’ minds but just got real in February with a 4% plunge in the stock market, in one week! That was the worst week in two years and the Dow dropped almost 700 points in one day, something it’s only done 17 days before.
Now I’m not saying the stock market is heading lower for another crash. This bull market is the second-longest in history and stocks are ridiculously expensive but that doesn’t mean it all has to end this year.
But it will end. Just the nature of the markets and our economy means there will be booms and busts. People like to believe in the good times that stocks will always go up, but it just doesn’t work like that.
I pulled 50-years of stock market prices to find all the corrections, moves of more than 5% lower, and all the bear markets of 20% losses or more. There have been 26 corrections and six bears. Just the corrections, which have happened about once every two years, have posted an average loss of 12% and the bears have destroyed an average of 42% in stocks.
But that doesn’t mean you have to lose money. In fact, now could be a great opportunity to protect the gains you’ve made over the last eight years and make more money even if the market tumbles.
Why Will Stocks Crash in 2018?
It’s all about recognizing the factors that could drive a crash in stock prices and finding investments that won’t drop because of those factors.
I’m going to share a few of those factors I’ve been watching that are going to crush stocks whether it’s this year or next then I’ll show you five investments that will hold up and even grow your money.
The truth is that the factors that drive a crash are pretty obvious before the fallout. The only question is when it happens. I’ve worked as an economist and have seen these signals many times before.
First, the federal reserve is raising interest rates. The Fed helps to control the economy through its policy of borrowing and rates it sets for banks. If you look at a chart of the Fed’s assets, which is like money it has increased in the economy from its own borrowing, and the stock market, it doesn’t take an economist to see that all this stimulus really pushed the market higher over the last decade.
Now the Fed is taking that away. It’s increasing the cost companies pay to borrow money, it’s increasing the cost of home mortgages. All this is going to slow down the economy even against the new tax cuts.
We’re also seeing the beginning of inflation in wages and prices for the first time since 2011. All those companies announcing wage increases and bonuses is good for workers but it’s going to weigh on those company profits and it won’t be long before it forces layoffs and cost-cutting.
They say you can’t be a little pregnant and you can’t have a little inflation. I’ve been following inflation in energy, imports and a few other areas over the last year and it’s going to be the surprise event this year.
Those are the two big factors that could dump stock prices, but another is international trade. It’s a huge unknown and could lead to a selloff at any moment. I’m not making a judgement call on the fairness of trade deals, but this is a machine and anytime you start tinkering with a machine while it’s running, you’re going to lose a finger.
5 Investments for Stock Market Crash Protection
So now that we have an idea of why the market could plunge, we can look for investments that might not be exposed to these forces. These are investments and asset classes that don’t move in lock-step with stocks and will smooth out your returns, so you don’t freak out when stocks crash.
I’ve found five investments that will continue to give you positive returns this year and next even as stocks hit a wall.
First is investing in peer-to-peer loans on Lending Club. I’ve been investing in p2p for a few years now and have booked returns just under 10%. Now that might not sound great against double-digit stock returns but it’s double what you get from other fixed-income investments.
Investing in loans is nothing new. In fact, I guarantee you already have money in them through any pension plan or insurance. You see banks sell their loans to investors that need reliable cash flow so their biggest buyers of loans are pensions and insurance companies. With p2p, you cut out the middleman and become the bank yourself for higher returns.
Peer Lending is like bond investing but since most of the loans are only for three years, they don’t lose their value when interest rates increase. In fact, as rates increase, the rates on loans will increase as well and returns for p2p should hold up well.
P2P loans aren’t totally immune from an economic recession. There will be higher loan defaults but your returns are still going to be positive if you invest in high-quality borrowers. Check out this video and the loan criteria I use to pick loans for double-digit returns. Using these loan-picking factors, I limit defaults even if the economy slips and keep collecting payments even as stocks drop.
My next investment to protect from a market collapse is real estate crowdfunding. Now I started my professional career as a commercial real estate analyst and I’ve managed my own rental properties so real estate has always had a special place in my portfolio. No other asset has created as much long-term wealth as property.
There are a couple of problems with direct investment in real estate though. It’s expensive to buy even a single property, a minimum of tens of thousands of dollars, and there’s no way most investors can build a portfolio of different property types and in different regions to protect from those risks when you have all your money in just one or two investments. Besides that, managing your own properties is a constant headache with tenants and repairs.
So real estate crowdfunding is just the crowd meets real estate investing. Developers and investors list their properties on a crowdfunding platform that reviews the investment and the project owners. This is a detailed review and only about 5% of the projects ever make it on to the Streitwise platform which is where I do most of my investing.
You can invest as little as $1,000 in each property which means you can build up a portfolio of different property types and in different areas for that diversification. You also get professional management of the projects. The project owners send all debt or equity payouts through the platform and it gets passed on to investors.
Since these are longer-term projects, short-term market hiccups shouldn’t affect them. Real estate prices may follow the economy a little but there is still that natural demand from homeowners and commercial users so that supports prices.
I surveyed real estate crowdfunding sites on returns and found that debt investments average around 9% while equity returns average 15% annually. I like investing on more than one platform because it gives me access to as many deals as possible.
Browse available properties with a free account on Streitwise
Next on our list of safe investments is shares of utility companies and telecom companies. Both of these sectors have stable demand that doesn’t follow the economy up or down. You aren’t going to turn off the heat or stop using your cellphone in a recession.
Now you see that shares of utility companies also fell in the 2008 crash but not as much as the overall market. Plus, these companies are cash machines and pay higher dividends to investors.
So if you were investing in the Utilities Select Sector Fund throughout the market crash, you would have collected a dividend return of three to four percent. That dividend is always a positive return and the shares of these companies bounce back fast because of that steady demand.
Both utility and telecom companies are also going to be big winners in the tax cuts because the sectors were paying some of the highest corporate rates before the cuts. They also invest billions in equipment every year and that is cheaper now under the tax cut as well so I’m looking at these two sectors and the funds that cover them to do very well this year.
On that real estate theme is our next investment, real estate investment trusts or REITs. These are stocks of companies that hold mostly commercial real estate and pass the cash flow on to investors. They also get a special tax break because the pass most of their profits on to investors every year.
You can see that REITs also aren’t totally immune from a recession but those high dividend payments are always a positive return. Since they pass on almost all their profits to shareholders, REITs pay a higher dividend than most other stocks actually about double the dividend on the stock market.
Even in the real estate crisis of 2008, REITs have returned an average of 13.5% over decades. That’s well over the average return on the stock market and almost 8% of that is an income return from dividends.
Whenever the stock market tumbles, you want to be holding as much of your money in different assets as possible. That means asset classes like bonds and real estate so three of our investments here, those peer-to-peer loans and real estate investments fit this diversification that’s going to protect you from the stock market.
Our last investment here is shares of gold miners. Now you’ll see a lot of commercials and advice to invest directly in gold when the stock market crashes. That’s because gold is a safe haven investment and holds its value.
But I don’t like investing directly in gold because it means you have to time the market. It doesn’t pay a dividend and really doesn’t produce anything. All of your return depends on buying low and then selling high.
Gold miners on the other hand will benefit when gold prices increase during market crises but they also pay a dividend and produce profits on their production. That means gold miners are going to be creating value for their investors. Even if the price of gold comes back down when the market steadies, that value created will still be there and you can sell your shares for a profit.
Now I’m not talking about taking all your money out of stocks and putting it in these five investments. We’re not trying to time the stock market here, just shift our exposure to assets that won’t crash along with the market.
That means taking a portion of your money and putting it in these safety investments. If you’re like most investors, you probably have very little in any of these. Maybe you own some shares of utilities and telecom companies but most investors have less than a fraction of their wealth in these five investments.
I’ll keep watching the market and updating you on the potential for a stock market crash in 2018. The fact is we may never know exactly when the next market crash is coming. The best way to prepare is to invest in different assets, put your money in investments like p2p loans and real estate, so your wealth doesn’t get dragged down with stocks.
