On April 19, the United States sent a naval ship toward the Korean Peninsula capable of launching missiles at North Korea, heightening an already tense situation between the two countries.
Attacks - as well as the threat of attacks - between countries have been known to send the markets reeling. On the first day of trading after the Sept. 11 attacks, the Dow Jones plunged 7.1% in just one day. That was third-largest single-day loss for the index ever.
Today, we're giving you two ways to protect your money now if you're worried about North Korea's threats, courtesy of Money Morning Chief Investment Strategist Keith Fitz-Gerald.
In fact, Keith is closely monitoring the situation in North Korea and its impact on the markets. If the situation escalates, Keith believes we could see panic selling from shareholders.
With that in mind, he's eyeing two funds that can protect your portfolio if the markets fall due to any selling pressure that comes from the U.S.-North Korea conflict - which could cause the stock market to dip by as much as 10%...
How U.S.-North Korea Situation Could Send Stocks Diving
You see, U.S. and North Korea relations have been hostile for 50 years and have gotten worse in 2017 due to North Korea's repeated tests of long-range missiles...
The first came in February when North Korean leader Kim Jong Un tested a medium long-range ballistic missile called the Pukguksong-2. Then in March, the country launched four more ballistic missiles into the Sea of Japan. Three of those four came within 200 miles of Japan.
The United States responded by sending the USS Carl Vinson naval strike group toward the Korean Peninsula on April 19. Since then, the North Korean media has stated these "military provocations," which also include the United States conducting bomber drills with the South Korean military, could risk the start of nuclear conflict.
Now, the Trump administration is weighing military options against North Korea.
During his visit to South Korea on April 17, Vice President Mike Pence warned that the "era of strategic patience" with North Korea is over. In an April 28 interview, President Trump said "a major, major conflict" with the country is possible.
But Keith believes Kim Jong Un could fire missiles at U.S. allies any moment now. Those countries include North Korean neighbors Japan and South Korea.
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If this happens, the U.S. stock market could drop anywhere from 5% to 10% in just one trading session.
"If North Korea hit one of its neighbors, there would be panic-selling on a scale that no one's ever experienced," Keith told readers on April 24.
However, Keith warns investors not to follow the herd. Instead of selling, it's better to protect your money by buying funds that go up when markets go down. That's why Keith found two funds that can serve as hedges against market volatility.
"Hedging, by its very definition, means you're engaging in protective behavior, which - as I use the term - means you are not looking to sell everything," Keith noted. "Rather, you're looking to put specific tools like the inverse funds to work as a means of staying in the game."
Here are his two favorite defensive investments to make now to prepare for a market pullback, before the North Korea tensions continue to escalate...
These Two Funds Will Help Protect Your Money Now from the North Korea Situation
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The two hedges are the mutual fund Rydex Inverse S&P 500 Fund (RYURX) and its related exchange-traded fund ProShares Short S&P 500 ETF (NYSE Arca: SH).
Operated by Guggenheim Investments, the Rydex Inverse fund tracks the opposite daily performance of the S&P 500. For instance, a 1% decline in the S&P 500 yields a 1% gain for RYURX. These bets against the underlying stocks on the S&P 500 are called short positions.
But the more liquid short investment to make is the ProShares Short S&P 500 ETF, which provides inverse exposure to S&P 500 stocks. With a $3 billion market cap and average daily volume of 867,514, SH is one of the most popular inverse index funds on the market.
However, it's important to remember that these are not long-term investments. If the S&P 500 rises, these funds will decline in value. That's why they should only be used to prepare for a brief correction like Keith's predicted 5% to 10% drop.
And although these two funds won't provide explosive gains, they will fulfill the very important task of protecting your money. When market uncertainty is as high as it is right now, hedging your portfolio without selling your stocks is the best move you can make.
The Bottom Line: Relations between the United States and North Korea are arguably the most hostile they've ever been. With an unpredictable leader who likes to repeatedly show off his arsenal of weapons, North Korea could strike a neighboring country at any moment. If this happens, investor panic in the United States would cause a 5% to 10% sell-off in a very short amount of time. To protect your money, Keith recommends the short-based funds RYURX and SH. These short-term investments will ensure that your money won't be destroyed by North Korea's destructive actions.
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