But it's during these good times that wise investors should prepare for a potential crisis.
Most investors equate crisis investing strictly with the buying of physical precious metals. These investors think that buying metals like gold and silver protects them against an extreme inflationary environment. They are not wrong. But because it's impossible to accurately predict the next crisis, diversification across multiple asset classes is your best bet to weather any economic storm.
The worst thing an investor can do in the face of an uncertain future is to build a portfolio that's too heavily weighted in only one asset class.
With this in mind, I built a list of five traditional and nontraditional asset classes every investor should hold in their "crisis-ready" portfolio. I will follow up with a series of five articles, digging deeper into each asset class and providing specific suggestions on how and why to add each one to a portfolio.
|1. Gold and oil|
These two commodities are traditional crisis investments. Gold has a strong historic precedent as a hedge against inflation, while oil stocks can be a hedge against civil unrest in politically volatile regions. In addition, the strong correlation between gold and oil can be seen in the chart below.
This relationship is the result of two economic forces. When oil increases in cost, it results in costlier goods and services across the board as transportation costs move higher. This increase in prices leads to inflation and, as we know, gold value increases in inflationary times.
The second and less well-known correlation is government purchases of oil with gold. Iran is notorious for avoiding U.S. sanctions by trading billions of dollars in oil for similar amounts in Turkish gold. In a following article, I will address how investors can use this relationship to design a strong crisis portfolio.
Agricultural commodities like soybeans, corn and wheat can play a vital role in a well-diversified crisis portfolio. Commodities tend to increase in tandem with inflation. However, should fear grip the economy, commodities can tumble just like the stock market.
|3. Real estate|
It's easier to think of a crisis in the real estate sector today, than real estate as a crisis investment. The truth is everyone needs someplace to live. There is only so much available property, and wise purchases of real estate remains a core feature of successful investment portfolios.
There are multiple ways to invest in real estate and profit from it -- even during a crisis. In fact, a crisis can be used as an opportune time to get into the market.
I will delve deeper into the many ways real estate can be part of a diversified portfolio in an upcoming article in this series.
|4. Currencies, coins, bullion|
These are three distinct assets but all three can be physically held. Currencies, as in the Forex market, are proven shelters in the storm depending on where and what type of crisis occurs. One example is the way the U.S. dollar served as a fortress of strength during the recent European crisis. Investors who held greenbacks during the euro zone banking crisis were handsomely rewarded.
Bullion is another word for gold in its physical form. It tracks gold as an asset class, but is not exposed to broker risk as investors physically have possession of the asset.
Coins, on the other hand, despite being similar to bullion, have additional numismatic value to dealers and collectors. I will provide guidance on how and why to diversify into currencies, coins and bullion in another article of this series.
|5 Art, wine and other collectables|
This section will delve into the nontraditional assets for crisis investing. Believe it or not, there are hedge funds that specialize in each of these three assets. They clearly add another layer of diversification on top of an already diversified crisis portfolio.
Action to Take --> To really weather the storm -- and even profit -- during a crisis, investors should have a well-diversified portfolio. The five assets mentioned in this article are a solid starting point.
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