Where Can We Hide in a Financial Crisis?

Markets are booming today, but just 18 months ago, things looked like this:

Ouch.

I lost about 22% of my portfolio in less than five weeks. It certainly made life interesting.

Today, markets sit near all time highs and jobs go begging. It’s a far cry from the darkest days of the COVID disaster.

But the next financial crisis is coming. It could be in a month, a year, or ten years. But as investors, we need to be prepared.

One of the best ways to protect ourselves is to own assets that are not correlated with stocks. That way, when the market is falling off a cliff, a part of our portfolio is preserved.

People often look to overseas stocks or real estate to diversify. I own those myself. But although they can deliver nice returns, they are highly correlated with US stocks.

Global stocks have a 0.97 correlation with the S&P 500, a near perfect match. Even Real Estate Investment Trusts (REITs) show a very strong correlation (0.70).

Investment grade bonds (-0.06) and cash (-0.17) show low correlations with stocks. But the yield to maturity on that Bloomberg investment grade bond index is just 1.42%, way below inflation. And cash in a bank account returns about enough to buy a candy bar at the end of the year.

So where do we go? Here are some options:

Litigation Finance

This arcane corner of the financial world gives plaintiffs and lawyers money to sue people. The lawsuits usually involve a small company suing a larger one.

Returns can be eye popping. But it’s difficult for those of us who aren’t lawyers to understand what we’re investing in. Are these good cases likely to win? Or suckers’ bets?

It probably only makes sense as a small portion of a portfolio, at most. And minimum investments can be high, making it less attractive to many.

Farmland

Ya gotta eat, right?

New platforms have sprung up to help people invest directly in farmland. Returns can exceed those of stocks, and correlation with US stocks is almost nonexistent (-0.05).

This could be an attractive area, but it’s quite unfamiliar to me, and probably to most other investors. I’d have to research it a lot more before jumping in.

Dividend Aristocrats

Dividend Aristocrats are blue chip stocks that have increased their dividends every year for at least 25 years. They’re household names like Coca-Cola, Exxon, and IBM.

They generally have higher returns than the S&P 500 with lower volatility. That’s a win-win.

But they’re highly correlated with the rest of the index (0.9). That said, they’re still better than overseas stocks in this respect, and not dissimilar to real estate.

Wrap Up

We have some interesting options for keeping our portfolios safer in the next bear market while preserving yields today. I encourage you to dig deeper into your favorite categories.

What asset classes do you favor in a crisis? Let me know in the comments at the very bottom.

More on markets:

Will Evergrande Spark a Global Financial Crisis?

Should Anyone Own Bonds?

How Solana Could Wipe Out Visa and MasterCard

Photo: “Tomb of Lehman Brothers” by futureatlas.com is licensed under CC BY 2.0

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