It’s the third week of January, and stocks are once again reaching all-time highs.
Over the last five years, the S&P 500 Index has risen 63%. If you include dividends, it’s up 80%.
This performance seems unjustified when you consider everything that has transpired over the last year.
We have seen virtually no earnings growth among the S&P 500 companies.
The industrial economy has been contracting for the last five months.
And there’s the threat of the U.S. president getting impeached.
At the same time, stocks valuations are at record levels. The S&P’s PE ratio is at a dizzying 25.06—the highest it’s been in a decade.
The last time valuations reached above these levels was just before the 2008 stock market crash.
All of which raises a question…
If the slowing earnings growth, a soft industrial economy, and sky-high valuations aren’t enough to slow the stock market, what on earth would be?
I understand that the Fed is printing money and that this capital has nowhere else to go but into the stock market. Still, at some point, something’s got to give.
Don’t get me wrong. I’m still long U.S. stocks. I think they’ll continue to rise as long as the Fed keeps pumping liquidity into the market.
Nevertheless, it’s environments like this when I start wondering… what happens when the music stops playing?
The Question Isn’t When, But Why
I don’t know when the next stock market crash will be…
Tomorrow, in six months, or five years from now.
But, the fact is, it’s going to happen.
That is why I continue to encourage investors to add some protection to their portfolios, the market’s continuing impressive performance notwithstanding.
Protection could come in the form of options, bonds, real estate, or other countercyclical assets… whatever makes most sense to you.
Sure, that means sacrificing some returns when things are going well. It’s incredibly tempting to throw caution to the wind when you see the rest of the market earning more than you are.
But this feeling of missing out on gains is nothing compared with the pain of seeing your hard-earned cash evaporate overnight.
And, in fact, this is precisely the time—when the market is soaring towards new highs—to start adding protection. Nobody’s thinking about a potential downturn, so you can buy countercyclical assets at much lower prices than when things are less certain and the demand is higher.
This Is How I Protect My Portfolio
My countercyclical weapon of choice is gold stocks.
The Feds have printed so much cash lately that they have made money markets and bonds worthless. Which means that, in the future, hard assets such as gold and real estate will be in great demand.
Moreover, gold tends to perform well in periods of high inflation, market crisis, and stagnation. All of which are likely to occur when the next downturn arrives.
Finally, gold has been a store of value for thousands of years, so there’s little risk of it depreciating much.
For these reasons, I’ve increased my gold positions this week. They now represent 20% of my investment portfolio.
I understand that’s quite high… and I typically recommend that investors hold at least 10%.
But I admit it… I’m much more conservative with my money than most. Furthermore, I’m generating strong returns in the rest of my portfolio. I can afford this level of protection from gold.
The three gold miners I’ve just added to my holdings are B2Gold (NYSE: BTG), Alacer Gold (OTC: ALIAF), and Detour Gold (OTC: DRGDF).
I would suggest you look into them. They’re all financially sound companies, which is vital when investing in gold-mining companies, and they trade cheap compared with the cash flows they generate.