Will you make sure to bring your “umbrella”?

As we move into the second half of this year, I hope you do. Because I fear many investors will not. In their eyes, the sky is too clear and sunny now to worry about rain. “Why lug around something I probably won’t need?” they reason.

It’s time to debunk such a carefree notion. I want to make sure that you pack your umbrella for the storm ahead… and maybe even help convince some of your friends and family to pack theirs, too.

Let’s be clear – I don’t expect a major correction right around the corner. But the storm clouds are gathering. They’ll get here sooner or later. And the time to prepare is now.

Tomorrow in DailyWealth, I’ll show you why. For today, though, I’ll start by sharing two ways you can act now to reduce risk in your portfolio.

These two steps will help protect you before the crisis – and they can even help you make money in the face of much lower prices.

Let’s get started…

So just what kind of “umbrella” am I talking about?

It starts with portfolio protection. Last June, I wrote to DailyWealth readers about the benefits of investing in portfolio protection such as gold and other hard assets that retain their value well.

For the sake of your long-term wealth, you must allocate part of your capital base to measures that will help protect the whole in the event of a sharp market downturn.

That isn’t everything, though. To set up an all-inclusive investing umbrella that can preserve and grow your wealth, you’ll need two more forms of protection.

The first is reducing your exposure to any one “factor risk.”

That term is all the rage among institutional investors these days. In short, it means identifying potential risk exposures in a portfolio and then working to reduce those threats through diversification.

In theory, it’s a great exercise. But in practice, most institutional investors take things too far and end up owning too many small positions… In diversifying away potential risks, they also diversify away any chance at outsized returns.

Individual investors can make the same mistake. The answer is to strike a balance… and make sure you don’t place too much weight in any one bet, whether individually or in specific sectors and markets.

The second protection tool is occasionally holding more cash and “cash-like” securities.

One of the most important factors in determining how successful you can be during a bear market is simply how much cash you have on hand. This will keep you from being forced to sell good assets at bad prices because you have no safety net… And once markets stabilize, you’ll be in a better position to go bargain hunting if you have plenty of “dry powder.”

When a bear market is upon us, you’ll want to hold a much larger cash reserve. Of course, sitting in too much cash for too long mutes your returns… So it’s important that you “tilt” your allocations further into cash rather than sell everything. And it also pays to wait until market conditions are primed for a major fall.

All this amounts to a simple change in strategy… But sadly, many investors simply won’t take action in time.

Think back to 2008. Wouldn’t it have been great – even life-changing – to avoid much of the massive market sell-off? And then, with your net worth mostly intact, to buy world-class businesses like Disney (DIS) or Amazon (AMZN) at 50% discounts to intrinsic value or more… while the rest of the world was in forced-selling or panic-selling mode?

That’s how I want you to be positioned ahead of the next inevitable downturn.

With your asset base protected, you’ll be able to think clearly, “play offense,” and buy great businesses at deep discounts… while other investors are reeling.

Good investing,

Austin Root

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Source: Daily Wealth