The key stock indices continue to make new highs. Each day, there's someone on the TV saying how we are going higher. Some are estimating key stock indices will do much better this year than last. No matter where you look, the opinion seems to be the same: buy stocks and your portfolio will do great. With all this happening, investors must remember one very important lesson that the stock market has taught us over and over again: a rising tide lifts all boats, but tides come and go.
Let me explain…
As key stock indices are going higher, investors' portfolios may look great. Their return may be exuberant, but they shouldn't forget that markets tend to move in waves. The conditions may look rosy now, but eventually, it all turns. Key stock indices are known to have corrections—minor or steep.
When the times are good on the key stock indices, such as now, long-term investors have to keep market corrections and sell-offs in mind.
Generally, when the key stock indices turn, investors turn towards government bonds. This is mainly because they move in the opposite direction of the stock market. Investors can protect their assets when key stock indices decline by going heavyweight on exchange-traded funds (ETFs), like PIMCO Total Return ETF (NYSEArca/BOND)—this ETF, like many others, invests in bonds with different maturities. Investors may even consider ETFs like iShares TIPS Bond (NYSEArca/TIP), which invests in the inflation-protected bonds issued by the U.S. Treasury.
Another way investors can protect their portfolio in the case that key stock indices sell off is through gold bullion. The yellow shiny metal has proven from time to time to be one of the best hedges against uncertainty and a protector of wealth. Investors can invest in gold bullion in two different ways. One way is through buying gold bullion through ETFs like SPDR Gold Shares (NYSEArca/GLD) or the iShares Gold Trust (NYSEArca/IAU). Both of these ETFs track the price of gold bullion.
The second way investors can invest in the precious metal is through gold miners. Investors wishing to use this strategy may want to take a look at an ETF like iShares MSCI Global Gold Miners (NYSEArca/RING). Instead of hand-picking one company at a time, investors with this ETF can get exposure to gold mining companies around the world all at once. Plus, it gives them a more diversified portfolio.
Furthermore, investors can protect their wealth when key stock indices are going down by selling their positions. This may sound like an unorthodox way of investing, but the reasoning behind this is very simple. When investors sell their positions when key stock indices are down, they are essentially doing two things at the same time: first, they are cutting the losses on their losing positions and taking any profits they have made off the table; and second, they are raising cash. When key stock indices finally settle, these investors may be able to get better deals and buy better-valued stocks compared to what they had before with the cash they raised.
This article Five Ways to Preserve Your Wealth as Key Stock Indices Decline by Mohammad Zulfiqar, BA was originally published at Daily Gains Letter.