Texas is still battling torrential rains and rising flood waters, but lessons learned from hurricanes are exactly the same ones that apply to finance…
by Zach Scheidt via Daily Reckoning
The shocking images and stories from Hurricane Harvey continue to pour in…
This weekend, I saw a picture of an assisted living home where residents were up to their waists in flood water.
I also heard about three different prisons that had to be evacuated. I can’t imagine the logistical nightmare of arranging transportation for these individuals ahead of the storm.
And then there was the Sheriff’s deputy who was stuck in her home, with flood waters rising, and a three-month old baby sitting in a car seat on the kitchen counter. That family had to be rescued by neighbor’s giant tractor combine!
As our nation sits riveted to the massive storm Mother Nature has served up, I’m reminded of the danger of an economic storm on the horizon.
Today, I want to share three key takeaways from Hurricane Harvey… takeaways that could go a long way towards protecting your wealth from a stock market hurricane…
Takeaway #1: Research & Understand the Risks
The National Weather Service, along with relief organizations like The Federal Emergency Management Agency (FEMA) have built extensive databases that help to predict the severity of specific storms and the aftermath that could occur.
By understanding the risks, who could be affected, and where the worst flooding will occur, these agencies can give residents an accurate picture of the dangers they face.
By a similar token, we can look at data on financial markets and understand more about the risks investors face.
For example, today’s market features some significant risks that are easy to see if you know where to look.
Traditional investors are infatuated with stocks like the FANG group (Facebook, Amazon, Netflix and Google), and they’re also willing to put massive amounts of capital into index funds — regardless of the price. This leaves many popular stocks over-priced and vulnerable to a sharp decline.
If you understand these risks, you’re much more likely to have a plan to avoid losing money when the next economic storm hits. Which brings us to our second takeaway…
Takeaway #2: Have a Plan, and EXECUTE that Plan
This weekend, we heard horror stories of people who didn’t have a plan and wound up trapped by Hurricane Harvey.
But what we’re not hearing about is the hundreds of thousands of stories of residents who got out of harm’s way and are now sitting in a dry place waiting out the storm. These are the people we want to emulate during the next economic hurricane.
Experienced investors — the ones who have survived previous market storms — will tell you that it’s extremely important to have a plan for what to do when the market trades lower.
And just as important, is the ability to execute that plan.
It takes a lot of discipline to sell overpriced stocks even when they continue to move higher… or to buy precious metals and other “safe” investments even when they are out of favor. But that’s exactly what smart investors are doing right now to protect themselves against the coming storm.
Over the past few months, we’ve been talking a lot about avoiding inflated stocks, and investing in resources like gold and silver. Hopefully you’ve already taken action. If so, you’re already benefiting from the recent breakout in gold.
Other resources like uranium, lithium, oil and natural gas will also be key areas to invest in, protecting your wealth from a decline in the dollar and from an overall market pullback…
Takeaway #3: Selling Insurance is Most Profitable AFTER a Storm
You’ve heard that it’s important to buy insurance well before a big storm is bearing down.
But did you know about the other side of that coin?
After a storm has hit, people are more likely to recognize the need for insurance, and make the decision to buy protection. All of this demand for insurance can naturally drive the price of policies higher. And insurance companies can make wider profit margins.
Using that same concept for markets, we should realize that there is a time to sell our insurance positions for top dollar as well.
Assuming you’re buying insurance positions like gold and silver today, you should eventually find yourself in a great position to sell precious metal investments at top dollar when the storm is at its worst.
Now timing can be a bit tricky here, but if you buy gold and silver today, I would encourage you to split these investments into two categories. One for long-term investments, and one for short-term trading opportunities.
This way, if gold prices spike sharply higher, you can sell some of your gold to lock in an excellent profit. This is similar to insurance companies selling policies at top dollar aftera storm has done its damage.
Another great strategy for selling insurance is to sell put contracts on quality stocks that have pulled back. This market strategy gives you instant income up-front, and also gives you an opportunity to buy stocks you want to own at a discount.
Here’s to growing and protecting your wealth!