A growing list of prestigious individuals and financial houses are telling investors that a downturn is coming. The market is still very bullish, but Ray Dalio and Professor Shiller point out that what goes up must come down, and they warn of a downturn in the next couple of years. There are several strategies that investors can employ in the face of such a downturn. One is to hold the lions share of your portfolio in cash. Cash isn’t making any money, and most investors don’t feel comfortable with a potential two year period of flat returns.
Another is to invest in companies and sectors that are likely to do well if such a downturn strikes. Bank of America, for example, is very bullish on gold. The bottom is in, and the risk curve is asymmetrical. They’ve put a $1350 price target on gold for 2019. That’s about a 12% upside, and leveraged funds ($NUGT) can potentially double that return. There is the strong possibility that crude oil will make advances as geopolitical tensions, sanctions, and a stubborn OPEC continue to hold sway. You can bet on crude with $OIL, and you can make leveraged bets with $UWT.
Perhaps the most dangerous position–in the short term–is to be long the major indices. Long-term index investors will plan to stay the course by staying long and keep buying through any downturn. I have no doubt that long-term value investors such as Warren Buffett will relish all of the discounted stocks that will be available in a widespread selloff. My fear for the average retail investor is that panic will set in, and they will have bought high and sold low–an age-old recipe for disaster. Many of today’s investors have never traded in a severe bear market, and many will have no idea what to do when momentum reverses. You will be fine if you change your allocations to a safety portfolio, and you will be fine if you just ride it out as Mr. Buffett and Mr. Boggle will do. You can be badly hurt if you are a panicked seller of damaged securities. The best advice is to strategize now, develop a plan, and stick to the plan when things get scary.