By John Persinos
As I've consistently warned you for several weeks, Wall Street has been living in coronavirus La La Land. The rude awakening is finally here. A microscopic pathogen has brought the stock market to its knees…again.
Despite political propaganda and wishful thinking, the coronavirus is far from contained. Cases of COVID-19 are in fact skyrocketing, in a third wave that's flooding hospitals throughout the country to overcapacity.
As of this writing Thursday morning, coronavirus fatalities totaled nearly 1.2 million globally and exceeded 227,700 in the United States. The U.S. currently averages 70,000 new coronavirus cases per day.
The stock market rally we've enjoyed since late March has reversed direction, as investors grow alarmed by the pandemic's resurgence. If businesses return to lockdown, the recession will deepen.
Millions of unemployed Americans are slipping into destitution and Washington hasn't provided new assistance. Exacerbating anxiety is the November 3 general election, which promises to be anything but peaceful.
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The stock market this week has been on a losing streak. On Wednesday, the Dow Jones Industrial Average fell 943.24 points (-3.43%), the S&P 500 shed 119.65 points (-3.53%), and the tech-heavy NASDAQ plunged 426.48 (-3.73%). The CBOE Volatility Index (VIX), commonly referred to as the stock market's fear gauge, spiked nearly 21% to surpass 40, a four-month high.
Global stocks also have been plummeting, as COVID's comeback prompts Europe to reimpose quarantines. In pre-market futures trading Thursday morning, all three main U.S. stock market indices were poised to mount a modest comeback and open in positive territory, but the danger is far from over.
Your Checklist for "Defensive Growth"
If you've already adopted the following protective measures, you should be in good shape to ride out future volatility and downturns. If you haven't, it's not too late.
1. Rotate into defensive stocks.
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Your wealth preservation strategy should include the right asset allocation, tailored to your financial goals.
Elevate cash levels to about 45% of your portfolio, a percentage that's generally appropriate now. Keep your powder dry, for the bargains that are sure to arise when the November 3 election is over and the pandemic starts to wane.
As the recession grinds on, start dipping your toes into defensive sectors. I suggest health care, consumer staples and utilities. These three sectors are reporting the strongest third-quarter 2020 earnings so far (see chart).
I'm particularly keen on utilities stocks. As the managing editor of our premium trading service Utility Forecaster, I enjoy a front-row seat to the sector's combination of steady growth, income and safety. (For the best utility stocks now, click here for our report.)
2. Keep at least 10% of your portfolio in bonds.
You may be a growth investor and still several years from retirement, but during the current stage of contraction, don't give short shrift to fixed-income. I recommend bond funds, for greater diversification. Notably, short-term bonds are less vulnerable to interest rates than longer-term bonds.
3. Decrease your portfolio's weighting in cyclicals.
This is no time to be heavily weighted in cyclical sectors, such as consumer discretionary goods. During this recession, rotate into non-cyclical, more stable companies that provide services that are consistently used regardless of market or economic conditions (e.g., utilities).
4. Diversify among market valuations.
Spread your portfolio among large-cap, mid-cap and small-cap stocks. One often ignored move is to invest in mid-caps, which provide greater growth potential than large caps but less risk than small caps. A mid-cap is defined as a company with a market capitalization between $2 billion and $10 billion.
5. Seek global diversification.
Don't withdraw from the world stage and become a parochial investor. To be sure, overseas markets are grappling with multiple crises, but the global diversification imperative is intact and applies to all geographic regions and countries. An underappreciated investment destination right now is Latin America, which analysts expect to gain traction in the post-COVID era.
6. Add quality dividend stocks.
Dividend-paying stocks are proven tools for long-term wealth building, but they're also safe harbors because companies with robust and rising dividends by definition sport the strongest fundamentals. If a company has strong enough cash flow and sufficiently low debt to generate high and growing dividends, it also means that the balance sheet is inherently solid enough to sustain the company through the dark days of the pandemic.
7. Increase exposure to scarce commodities.
The world is short of vital commodities, such as copper, zinc, lithium, and "rare earth" minerals. When economic growth returns in 2021, these commodities should soar in price. In particular, agricultural assets face multiyear tailwinds, as the globe contends with a looming food crisis.
8. Use stop losses when buying stocks.
One of the most widely used devices for limiting the level of loss from a dropping stock is to place a stop-loss order with your broker. Using this order, the trader will pre-set the value based on the maximum loss the investor is willing to tolerate.
If the last price drops below this fixed value, the stop loss automatically becomes a market order and gets triggered. As soon as the price falls below the stop level, the position is closed at the current market price, which prevents any additional losses.
9. Practice position sizing.
As an adjunct to these 10 rules, always practice "position sizing." Position sizing refers to the size of a position within a particular portfolio, or the dollar amount that an investor intends to trade.
Position sizing helps you determine how many units of a security you should purchase, which in turn controls risk. As a rule of thumb, risk no more than 2% of your investment capital on any one trade.
10. Make sure your portfolio contains gold.
Geopolitical turmoil, trade war uncertainties, and the persistent pandemic have propelled the price of gold in recent months. Gold probably has further to run.
The rule of thumb is for a portfolio allocation of 5%-10% in either gold mining stocks, exchange-traded funds (ETFs), or the physical bullion itself. I prefer gold miners, which offer exponential gains because of corporate operating leverage. To learn about our favorite gold mining stock, click here for details.
John Persinos is the editorial director of Investing Daily. Send your questions or comments to mailbag@investingdaily.com. To subscribe to John's video channel, follow this link.
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