Every economy, no matter how strong, skids into recession as part of the natural cycle of ups and downs. And each recession has one common feature: big losses in equities.
In the dot-com crash, for example, most internet stocks went down 70–90% from their all-time highs, which was a death sentence for investors who heavily speculated on tech stocks.
In 2008, the whole S&P 500 index suffered a fall of 38.5%. Now, if you could afford to wait until the market recovered, you were fine. But for those who needed money to cover immediate living expenses — or worse, retirement plans — it was devastating.
As such, hedging your portfolio against a downturn in equities is key to long-term financial protection.
But how exactly do you shield your portfolio from a recession?
Today, Olivier Garret, the CEO of the Hard Assets Allice, reveals the No. 1 hedge against a stock market crash.
All the best,
Editor, Money & Crisis
The Best Hedge Against a Stock Market Crash
In order to avoid or mitigate losses during a crisis in equities, you want to hold assets in your portfolio that are not correlated to the stock market.
In simple terms, non-correlated assets tend to move in the opposite direction from equities.
For example, treasuries and investment-grade corporate bonds are usually largely uncorrelated to the stock market. Unfortunately, an allocation to bonds hardly makes up for equity losses at current interest rates.
Worse, as bonds are approaching all-time highs after a multi-decade rally, buying this asset class at today’s prices exposes you to a lot of downside risk.
Bottom line: The standard 60/40 allocation won’t work this time around.
But there’s one time-tested asset class that beats everything when it comes to hedging losses during a stock market crash.
Gold is typically not correlated to the stock market. That means if equities zig, gold tends to zag.
But during a recession, gold’s correlation to stocks decreases even more than usual.
Check out the chart below to see how gold’s correlation to other asset classes changes when the economy moves from expansion to contraction…
(A “1” correlation means that the asset classes always move in the same direction; “0” means they move together about 50% of the time; and “-1” means they move in opposite directions.)
As you can see, gold is already uncorrelated to the S&P 500 during periods of economic growth. But as the stocks fall, the correlation plunges further into the negative.
That means more often than not gold will move in the opposite direction from stocks during a recession.
(Editor’s Note: Click here to claim your free guide to investing in gold and silver.)
History Doesn’t Lie
There have been seven recessions since 1965.
In five of the seven recessions, gold went up. And during three of those times, the metal soared by double digits. Even in the midst of the 2008–2009 financial crisis, gold moved higher.
There was only one recession, in 1990, during which gold suffered a substantial decline of 9.1%.
The Next Recession Is Imminent
The main takeaway here is this: To preserve your investment portfolio and financial well-being, you must own a meaningful amount of gold bullion before the next recession.
No prediction about future events or getting the timing right is required. History clearly shows the odds of another recession are 100%.
This makes gold an absolute portfolio necessity. I know many gold critics who own gold because of this exact argument.
But don’t get me wrong. I’m not suggesting that you sell out your entire equity portfolio and use all the money to buy gold. The rule of thumb — which I personally follow — is to hold about 5-15% of your investments in gold.
A little allocation to gold helps you shield the rest of your portfolio from the strong likelihood of financial losses, be it a fall in equity value or a currency devaluation.
And that’s the whole purpose of investing in gold.
Those who own gold stand a greater chance of winning in the next recession than those who do not.
Full disclosure: My personal allocation to precious metals is now at the higher end of that spectrum. Over the last few years, I’ve increasingly reduced my allocation to equities and bought more precious metals, which have been out of favour (and cheap) lately.
To golden opportunities,
Founder and CEO
Hard Assets Alliance
Editor’s note: To start investing today, claim your free e-book:Investing in Precious Metals 101: How to Buy and Store Physical Gold and Silver.
Find out how to make asset correlation work for you… how to buy gold and silver… and which type of gold makes for the safest investment.
It’s the definitive guide for investors new to the precious metals market. Get it now.