For many of us, this past election was one of the hardest of our lives because neither candidate seemed like an ideal option. Even now that Trump is in office there is still a lingering fear about what kind of changes he will actually make in this country. So far there is lots of uncertainty as he has not stuck to many of his promises before getting elected. For now, we have seen positive growth in the stock market and there is lots of speculation that Trump’s economic policies COULD boost growth, interest rates, and infrastructure spending. If there is one thing that the entire American population can agree on right now it’s that we don’t really know what’s coming in our future.
I’d like to point out that I don’t really have a political stance. I simply interpret what’s going on in the economy and then try to make money off of it. This article is not meant to bash Trump or say that he will destroy the economy. I’m merely writing to give you ways to invest IF that does happen. I always like to be prepared for any economic climate that may encompass our society. For those of you that believe Trump will cause our economy to deteriorate, I’ve provided you with 3 profit from that thinking.
Method 1: Short SPY
The market is overbought! If you keep up with the news, you may be hearing this more since we are hitting higher-highs in the stock market the past couple of weeks. We have not had a recession in over 7 years and remember the stock market is cyclical. It has periods of bull markets and periods of bear markets. A good way to get exposure to the entire downside movement of the market is to short the SPY. The SPY is an etf that represents the index known as the S&P 500. If you don’t recall what etfs are, check out my article, Buying Instant Diversification. When you buy a stock/etf/mutual fund you are going long on the position (you believe the value is going UP). Shorting is just the opposite. You believe the investments value is going DOWN. Therefore, if you believe we will see a downturn in the market you would short the SPY to get exposure to the entire S&P 500 index, not just one stock in particular. The S&P 500 has gone up an outstanding 72% in the past 5 years. Could it be time we see a contraction?
Method 2: Buy Gold
If you recall in my article, How Precious is Gold These Days?, I described how gold is a safe haven when we see any economic downturn. The night the election numbers were coming out the value of the stock market was plummeting and gold was skyrocketing. The same was true when the Brexit occurred. Gold soared 8% and hit a 2-year high while global stock markets lost about 2 trillion dollars! Gold is a commodity that has performed inversely from stocks for many years. The price of gold has had a positive return in each of the bear markets of stocks since 1971. To invest in gold you could buy individual gold companies but I recommend buying etfs that track gold such as GLD. These give you exposure to the gold market and also spread out your risk.
Method 3: Buy Leap Puts
The last strategy is a bit more complex and involves leap put options. I would only use this strategy if you are a more advanced trader. If you are unfamiliar with what options are, check out my article, Great Returns Investing Little of Your Own Money. Basically, leap options are options contracts with expiration dates of over a year or greater. Recall buying puts means that you are bearish on the investment. With the expiration being so far out you really don’t have to worry so much about time decay and you could see great returns if our economy started to deteriorate. For your selection on the underlying security to buy the puts on, I would stick with an entire index like DIA or SPY OR a particular stock sector that would get hit harder under Trump’s presidency such as cyclical stocks. Cyclical stocks are those that are greatly affected by the swings in the economy while defense stocks are ones that do not take as much of a blow in a recession. These are often companies that produce durable goods such as toilet paper, toothpaste, food, and so on.
Best Strategy! Plan for Worst, Expect the Best
I’ve mentioned this in previous articles, but I will say it again, WE CANNOT LIVE IN FEAR. No matter what your personal beliefs are with Trump or what’s coming in this country’s future, you cannot just assume that the market is about to come crashing down. People have been saying the market has PEAKED and we are bound for a recession but WE HAVE BEEN HITTING NEW HIGHS ON THE DOW SINCE 2013!
Trump being in office does change things but I still fully believe that you need plan for the worst, but expect the best. This means that the core of your portfolio still involves being bullish on the market we are in right now but also hedging downside risk with positions such as the ones I described above. Remember, your long-term approach is diversified across asset classes and has positions in it that will protect you if we do go into a bear market. Right now, I personally would not invest a large portion of my portfolio in these strategies because the market is trending up. Recall, the trend is your friend. When we start to see signs of pull back and support levels breached on technical charts, we can then begin to shift our strategy into bearish territory.
Homework: Think about which one of these strategies you could incorporate into your current portfolio if we do start to see a downturn in our economy.