Stock markets are at record highs. As a result, there’s a greater chance you might invest and lose money. When valuations are high, stocks are priced for perfection. And when stocks unwind, they unwind hard as the stampede tries to get out.
There’s only one thing worse than buying a stock that’s going down that continues to go down after purchase. It’s buying a stock that’s going up but ends up going down soon after purchase! A lot of retail investors are wondering whether NOW is the time to jump back in with major US indices at record highs.
Stocks Are Volatile
Between the recovery years of 2010-2012 there was a net cash outflow of $360 billion dollars in US Stock Funds according to Investment Company Institute. Year to date there have been roughly $41 billion in net cash inflows. It’s the classic “day late and a dollar short” herd mentality that we see over and over again.
I’m personally hesitant about chasing the markets here and have taken some profits to revenge spend for a better life.
That said, I also hate missing out on a potential “too the moon” scenario where stocks continue to percolate higher. Stocks generally always tend to overshoot on the upside and downside thanks to greed and fear. Especially some of my favorite growth stocks.
So what is a late and greedy investor supposed to do in this environment where the stock markets are sitting at record highs? Hedge of course!
Stock Markets At Record Highs = Hedge
Take a moment to study the chart of a four year term Dow Jones structured note below. This is an example I used years ago.
The chart says that you get 100% of your money back if the the structured note closes between 0% to -10% during the duration of the note. Anything beyond a 10% decline and you start suffering a 1-for-1 decline + the 10% buffer. In other words, if the Dow declines 15% over the next four years you lose only 5%.
On the positive side, if the Dow Jones gains anywhere between 0.1% and 20% over a four year period, you get a 20% return on your money. If the Dow Jones gains more than 20% you participate in 100% of the upside.
This structured derivative is perfect for someone who wants some downside protection while participating almost fully in any further upside. The Dow is roughly at 14,500 today. Only after the Dow Jones breaks below 13,050 will the investor start losing money on paper.
There’s also a reasonable chance over the next four years that even if the DJIA breaks below 13,050 it will recover above 13,050 to provide the investor with at least a return of all their capital.
The downside of purchasing such an investment is a four year lockup period and the loss of annual dividend payments that equates to roughly a 2% yield a year.
Where Can You Buy A Structured Note To Hedge?
This particular structured note is through Citibank. However, I spent some time talking to a Wells Fargo and JPM Chase personal banker and they also offer such products.
The only hurdle for some is that you need investable liquid assets of usually $100,000 (Citibank) to $1 million (JPM Chase) minimum in order to invest. Perhaps this is one of the reasons why the general public doesn’t feel wealthy with stocks at record highs. Exclusion.
The other way to create a similar structure is by building your own derivative portfolio with your online broker with no apparent minimums. I know E*Trade and Fidelity (where I have assets) can help build such a structure, and I’m sure other platforms can as well. You can simply ask your representative to put together something similar for you.
The whole idea is to protect yourself from poor timing. The best example is buying stocks right before the March 2020 meltdown.
Overcoming The Fear Of Investing In 2021+
As a value investor, I loathe to purchase anything after a run-up. The stock markets are at record highs, yet we’re still in a global pandemic. Valuations are around 35X trailing earnings,. This means earnings must rebound by 30% just to get closer to a historical reasonable average of 25X.
Finding some downside protection gave me the courage in June 2012 to dump a large chunk of change into the markets when the Dow was at 12,000. I had just left my six-figure finance job to retire early. The greedy investor in me wants as much exposure to the upswing as possible. Yet, the retiree in me wants to protect my nest egg at all costs.
The good thing about stock markets at record highs is that they tend to continue going up over time. If you can hold on for the long-term, you should do fine. But I highly suggest you diversify your investments with various passive income streams. You just never know when the next collapse will happen.
Stay On Top Of Your Finances
The best way to become financially independent and protect yourself is to get a handle on your finances by signing up with Personal Capital. They are a free online platform which aggregates all your financial accounts in one place so you can see where you can optimize.
Before Personal Capital, I had to log into eight different systems to track 25+ difference accounts (brokerage, multiple banks, 401K, etc) to manage my finances. Now, I can just log into Personal Capital to see how my stock accounts are doing and how my net worth is progressing. I can also see how much I’m spending every month.
The best tool is their Portfolio Fee Analyzer which runs your investment portfolio through its software to see what you are paying. I found out I was paying $1,700 a year in portfolio fees I had no idea I was paying!
They also have the best Retirement Planning Calculator around. It uses your real data to run thousands of algorithms to see what your probability is for retirement success. Once you register, simply click the Advisor Tolls and Investing tab on the top right and then click Retirement Planner.
There’s no better free tool online to help you track your net worth, minimize investment expenses, and manage your wealth. Why gamble with your future?
Invest In Real Estate As A Hedge
With the stock markets are record highs, investing in real estate is a great way to diversify your holdings. Real estate tends to outperform stocks when stocks are down about 10% – 15%. The same thing with bonds. But with real estate, you have a tangible asset that is less volatile, provides utility, and generates income.
Take a look at my two favorite real estate crowdfunding platforms that are free to sign up and explore:
Fundrise: A way for accredited and non-accredited investors to diversify into real estate through private eFunds. Fundrise has been around since 2012 and has consistently generated steady returns, no matter what the stock market is doing.
CrowdStreet: A way for accredited investors to invest in individual real estate opportunities mostly in 18-hour cities. 18-hour cities are secondary cities with lower valuations, higher rental yields, and potentially higher growth due to job growth and demographic trends.
I’ve personally invested $810,000 in real estate crowdfunding across 18 projects to take advantage of lower valuations in the heartland of America. My real estate investments account for roughly 50% of my current passive income of ~$300,000.