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After a tough week in the markets, we're facing a sobering reality that the coronavirus's continued spread could very well turn into a full-fledged pandemic. The best thing to do is prepare on all fronts to meet this reality head-on.
As public health agencies around the globe hopefully take strong action and necessary next steps to contain a further spread of the virus, it is my job as Money Morning Chief Investment Strategist to provide you with the necessary next steps and tools to not only help protect your money, but also help you profit while the rest of the market panics and sells off.
And the how is much easier than you think. That's why today, I'm going to show you the four simple tactics I use that will not only defend your portfolio against loss, but will also help make you money…
Estimates are all over the map.
The epidemiologists that I've talked to see two distinct possibilities at this point: a) the virus becomes nothing more than a flu-like nuisance that surfaces annually, or b) the virus turns into a series of self-sustaining "blooms" in major urban areas where close-contact exposure is unavoidable.
My own experience with SARS and the Avian Flu in China makes me think that it's the latter. I doubt very seriously that China is giving us anything even remotely resembling the whole story.
Worse, I also believe the disease is already out of control because governments did not act quickly enough to contain the emerging risks.
From a financial perspective, I hear a lot of supposed experts talking about how the flu kills more people, that this is relatable to other experiences, and so on.
What a load of hooey.
I was livid to hear White House Director Larry Kudlow's assessment that the United States has contained the coronavirus and that the economy is "holding up."
If that were true, the CDC wouldn't be warning about "severe disruption to American life" nor would it be telling people to "get ready now!"
You may or may not agree, and that's OK. In fact, that's great!
My job is not to take sides – good or bad, popular or not. My job is to assess probabilities and cold hard facts in my capacity as Chief Investment Strategist.
The possibility that we won't have a major outbreak right here in the United States is miniscule at this point. I see it as not a matter of "if," but "when" because of the nature of international air travel and reports that the virus is now jumping from person to person in Europe and the Middle East, where in some countries healthcare systems are primitive if they exist at all.
Worst case, I see this stripping a few thousand points from the Dow and 10-year yields dropping as low as 1% before this is over. The difference between probable and possible is becoming more razor-thin by the minute.
I'm not trying to scare you, but I would be remiss if I didn't tell you the truth. Of course, there's always action to take to keep your portfolio as healthy as possible.
Your Coronavirus "Hedge" Actions to Take
There are plenty of ways to hedge, ranging from simple mutual funds and ETFs to all sorts of options, futures, and more.
I'm also a keen proponent of zigging when everything else zags. That's why I recommend specialized inverse funds like the Rydex Inverse S&P 500 Strategy Fund (RYURX), which appreciates as the S&P 500 declines, or its cousin, the ProShares Short S&P 500 (NYSEArca: SH) exchange-traded fund. These are both up by about 6.38% and 6.5% respectively since last Friday's close.
Don't make the mistake of thinking this is an all-or-nothing decision, though.
Studies show that allocating as little as 1% to 3% of investable capital to a choice like these can substantially stabilize your overall investment portfolio while ensuring you have dramatically lower exposure to market volatility that will demoralize investors without a comparable safety net.
It's a move that can help you stay "in to win" – something that's vitally important over time.
More sophisticated folks wanting to lock in specific profit targets or ranges may find options strategies like the Profit Collars I wrote about recently to their liking. Or they may prefer to buy or sell directional bets, including various combinations of options spreads that accomplish the same thing.
At the end of the day, it doesn't really matter which avenue you take. Just that you take one and stick to it.
As for buying stocks… my "buy list" is as long as a CVS receipt, but I'm content to "wait" this out for a bit until traders calm down, especially if you've been preconditioned to "buy the dips" like Wall Street wants.
The coronavirus is an exogenous shock to the system and that makes it a very different animal from fundamental downturns, which are a dime a dozen.
Tactically speaking, I suggest that you buy in smaller amounts than you would otherwise with new money or use Total Wealth Tactics like Dollar-Cost Averaging that can help you sidestep the volatility that's scaring the pants off a lot of folks.
Keep Trailing Stops a little tighter than normal; you can always buy back in if things calm down. Take profits a bit sooner than you would instead of shooting for the fences every time.
Sectors that are going to get clobbered – as if they haven't been already – include anything related to retail exposure and to travel, including, for example, reservation and travel companies, airlines, cruise lines and convention planning companies, destination resorts, and casinos and the like.
Sectors that stand to gain (after the indiscriminate selling stops) include cyber shopping, Big Tech, remote medical providers, booze, and even trucking companies that'll have to haul everything if and when social adjustments like closing schools and shutting down public gatherings are implemented.
But there are no guarantees – period.
History shows that stocks with strong cash flow and dividends fall less and roar to recovery faster, which is why you will want to be very "choosy."
That means choosing "must haves" like companies offering a built-in defense against global recession. In fact, I'm sharing two new recommendations with paid subscribers in upcoming Money Map Report.
There's no need to rush into anything… or, for that matter, out of anything.
This is why we have a plan at all times.
Let me leave you with a thought…
Global growth may slow, it may sputter… but IT WILL NOT STOP.
That's why playing offense is still the best course of action, even if it doesn't feel good and even if there's more selling ahead.
I'll be with you every step of the way.
About the Author
Keith is a seasoned market analyst and professional trader with more than 37 years of global experience. He is one of very few experts to correctly see both the dot.bomb crisis and the ongoing financial crisis coming ahead of time - and one of even fewer to help millions of investors around the world successfully navigate them both. Forbes hailed him as a "Market Visionary." He is a regular on FOX Business News and Yahoo! Finance, and his observations have been featured in Bloomberg, The Wall Street Journal, WIRED, and MarketWatch. Keith previously led The Money Map Report, Money Map's flagship newsletter, as Chief Investment Strategist, from 20007 to 2020. Keith holds a BS in management and finance from Skidmore College and an MS in international finance (with a focus on Japanese business science) from Chaminade University. He regularly travels the world in search of investment opportunities others don't yet see or understand.