As the tumultuous ’60s came to a close, the Rolling Stones famously sang “Gimme Shelter,” begging for protection from the storm.
That’s not far from what investors are thinking as 2018 nears its end and the next bear market looms.
The Dow is now down 5% on the year and on its way to having its worst December since 1980.
With all the volatility we’ve seen in the past few weeks and stocks dipping into correction territory for the second time this year, investors are right to wonder if they can make money anywhere.
But even if the “mad bull lost its way” and we enter a bear market in 2019, we’ve got just the thing to protect your money from the storm…
A Port for the Coming Market Storm
Investors flock to “safe havens” when market conditions get dicey, as they are now.
Gold usually comes to mind, but it has been languishing for years. And right now, with inflation so low, it is hard to think that precious metals really have reason to rally.
But there’s another save-haven investment that could make you money as stocks continue to tumble.
Money Morning Chief Investment Strategist Keith Fitz-Gerald thinks the better choice is bonds.
They can be plain old Treasury bonds if you want to buy them the old-fashioned way. Or they can be bonds of top-notch corporations that make money year after year so they will have no trouble paying investors when the time comes.
Any security that pays a fixed stream of interest payments, whether it be a bond or a bond fund, a high-dividend stock or a real estate investment trust, can be a great choice when times are uncertain.
These assets pay you to hold them, and that added income becomes all the more valuable when times get tough. For example, the 30-year U.S. Treasury bond currently yields 3.02%, and that means you will earn that income year after year for the life of the bond.
Treasury bonds and notes also offer one more characteristic that makes them attractive in bear markets. Because they are backed by the full faith and credit of the United States, there is very little risk of default.
And there’s an even better way to own them right now…
How to Profit During a Bear Market with Less Risk
Bonds and interest rates necessarily move in opposite directions from each other. When rates fall, as they might if the stock market’s woes are correctly forecasting an economic slowdown, then bond prices must rise. It’s just the nature of the math.
While Treasury bonds are rated top-notch for safety, meaning you are fairly certain you will get your money back at the end of the life of the bond, they still have some interest rate risk. If rates do move higher, their prices will fall. Again, it’s all in the math.
But rather than putting your money at risk for 30 years, you can buy Treasury notes that mature in 10 years. Right now, you sacrifice a little bit of return – the 10-year now yields 2.80% – but the value of your holdings will be more stable than that of longer bonds.
It is the ideal combination of safety, stability, and yield.
And the easiest way to get them is through the iShares 7-10 year Treasury Bond ETF (NASDAQ: IEF). This is an exchange-traded fund that allows you to own a share in a portfolio of Treasury securities that mature in seven to 10 years. And as with regular stock-based ETFs, you can buy – or sell – them online in seconds with the push of a few buttons.
What is great about this ETF is that the manager adds and subtracts bonds into the portfolio as he or she sees fit. You don’t have to worry about collecting interest payments or making adjustments over time.
Right now, market demand pushed the fund to trade at a slight premium to its net asset value, but Fitz-Gerald is not worried about that. Expenses are low at 0.15% so most of your money works for you, not the manager.
Don’t forget that just because the bonds in the portfolio mature several years from now does not mean you have to marry this investment for the duration. This is a place to park some of your money while the stock market gyrates and falls. And its nice interest rate pays you to wait while you are protected.
Source: Money Morning