We've managed to avoid the great Mayan prediction of the end of
the world in 2012, along with countless doomsday prognostications
before it. But while we shrug off the continued calls that some
people still predict about the end of the world, it's undeniable
there are good reasons investors should have a "doomsday portfolio"
to protect them from catastrophic losses.
I'm not talking about the end of times, though. In the event of
runaway asteroids or "the second coming," saving for your golden
years will be the least of your worries.
But I'm also not talking about simply a global malaise in
economic growth or the gradual loss of purchasing power in the U.S.
dollar, either.
I'm talking about a quick collapse of order -- a collapse of
faith in our institutions and a resulting widespread loss in
financial assets.
And if you think this could never happen, then think again.
Hurricane Katrina destroyed more than $60 billion in economic
value and led to massive looting and a surge in energy prices. The
"once-in-a-century" disaster was followed just seven years later by
Hurricane Sandy, which caused damage that may cost up to $50
billion.
Officials in Japan have found radioactive material in produce up
to 200 miles from the Fukushima nuclear disaster.
The point is, large-scale disasters, man-made or natural, seem
to be getting stronger and more frequent.
Combine a few disasters with the collapse of a government or
financial systems abroad, and you've got the makings for hysteria
and catastrophicinvestment losses here at home.
While stocks and other assets would eventually rebound,
wouldn't it be nice to know that you are protected on the
downside?
Peace of mind and reasonable returns
Devoting a portion of your portfolio to "disaster insurance"
types of assets is not as difficult as it may seem. And it doesn't
have to come at the expense of returns, either. Three key points
can help you build a doomsday portfolio that will provide returns
as well as peace of mind...
- Own hard assets that can be used to store value in the event
currencies cease to carry popular support
- Ownshares of stable,defensive companies with production and
sales across multiple regions or countries to
diversify geo-political risk
- Own assets that provide enough current income to provide a
reasonable return on your money in the event the sun
comes out tomorrow.
With these three key traits in mind, here's a list of ideas and
the stocks that should help any portfolio survive a collapse during
bad times, but also perform well during the good times.
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1.
Gold |
The ultimate storage of value when the government is no
longer able to back its fiat money and investors
get nervous about the future... is gold. The precious metal
just saw its 12th consecutive year of gains, jumping almost
six-fold from the beginning of its run in 2000.
Gold can pay off on two doomsday scenarios: a jump
in inflation or a spike in market
fear. An investment in physical gold through
the
SPDR
Gold Shares (NYSE: GLD)
has easily beaten most other assets during the past
decade, but the fund pays no dividend .
While I think the shares could edge higher and would surge
in a crisis, I also want something that is going to pay me
to wait.
That's why I also like
Barrick Gold (NYSE: ABX)
. It's the world's largest gold miner, with 26 mines in
operation across five continents. This diversity in
production insulates the company from unrest in any one
part of the world. The stock pays
a dividend yield of almost 2.5% and is not
expensive at just 10 times trailing earnings .
[Further reading: "
Revealed: An Inside Look at Ron Paul's
Portfolio
"]
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2.
Oil-exploration and production |
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Even with alternative forms of energy coming into their
own, the world still runs on oil. The United States still
meets 40% of its energy needs through petroleum, and that
percentage is much higher in most of the other countries.
If confidence were to be lost in global governments and
currencies, then oil would be needed as a store of value
and for use in production.
Chevron Corp. (NYSE: CVX)
, the nation's second largest oil company, is the first to
come to mind. The company has assets and sales all over the
world and a strong 3% dividend yield.
I wouldn't put all my eggs in one basket
though, so I also like the exchange-traded fund (
ETF
)
Energy Select SPDR (NYSE: XLE)
for its 1.7% yield
and diversification across 45 energy
companies. The ETF carries an extremely
low expense ratio of 0.18% and trades at a
relatively cheap 12 times trailing earnings of the
companies held.
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3.
Water |
You can live for weeks without food and shelter, but
water becomes a necessity within just a few days. The
Journal of Environmental Science & Technology estimates
that 1 in 3 counties in the United States could face a
"high" or "extreme" risk of water shortages due to climate
change by the middle of the 21st century. Combine this
trend of scarcity with an unforeseen catastrophe that wipes
out some supply, and you've got hysteria on your
hands.
American States Water (NYSE: AWR)
provides water services in 10 California counties,
including drought-prone Los Angeles. The company pays a
2.8% yield and has a 58-year record of increasing
dividends. The price-to-earnings (P/E ) ratio of 19 might
seem high, but it is still below the industry average of
21.
Aqua America Inc. (NYSE: WTR)
could diversify your water exposure through 12 other states
in the U.S. and across other water and wastewater service
providers. The company pays a sustainable 2.6% yield and
has been successful in pushing through large rate increases
to pay for infrastructure projects and increase
annual revenue .
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4.
Tobacco |
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If you think tobacco is not a necessity, just ask anyone
who has tried to quit smoking. In the event of an
environmental or economic catastrophe, people may cut back
on most other products, but they will always buy their
cigarettes.
Lorillard (NYSE: LO)
is the third-largest cigarette producer in the U.S.
and has been increasing its market share
steadily from 11.8% in 2009 to 14.1% in 2011. The
stock pays a huge 5.2% dividend yield and trades at just 14
times trailing earnings, well under the industry average of
16.8.
Philip Morris International
(NYSE: PM)
diversifies exposure to the industry with its strong
international presence and brands like Marlboro and
Virginia Slims. The shares are relatively expensive at 18
times trailing earnings, but management has plans to expand
into the Chinese market, which could significantly increase
earnings.
[See also: "
The Most Hated Company on Earth is Bringing
Investors Big Profits
"]
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The "Doomsday" Portfolio
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Risks to Consider:
The risk to buying any kind of insurance is that you never need
to use it. That is why I have tried to selectinvestments that
would perform well even if the worst-case scenario fails to
emerge.
Action to Take -->
Just as you would not spend your entire income protecting your
house with insurance, you would not devote your entire nest egg to
a "doomsday portfolio." Allocating a small chunk, however -- maybe
5-10% -- of your equity portfolio to these kinds
ofinvestments is definitely a smart move.
.