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Build Plunge-Proof Portfolios

The Right Stocks for Correction Protection and Rapid Recovery

Written by Jason Williams
Posted February 8, 2018 at 7:00PM

In the aftermath of the massive downturn we saw start last week and carry into Monday, investors are still trying to find stable footing. And after yesterday, it looks like we're in for some more heartache.

Now, I never recommend selling when the market is down — it’s the opposite of what you’re supposed to do. But as the markets bounce between gains and losses, it’s definitely time to evaluate our portfolios.

Are we protected from the next recession? If the markets continue to head down after this week, will our investments ride the same crashing wave? Or will they rise above the chaos and protect our profits?

For most investors, the answer to those questions is a resounding “no.” Or at least an “I’m not sure.”

If you’re one of those people, then you can’t afford to miss what I’m about to share here…

Stellar Sectors for Correction Protection

Call it what you want: a correction, a crash, a drop. The name doesn’t really matter. It’s the losses that occur that are important here.

No matter what you think or hear, there’s always a chance the stock market will take a turn for the worse. This week, we saw the Dow drop more in one day than ever before in its entire history. And we saw it happen twice.

But while the Dow shed over 10%, many stocks slid far less. Some even went up.

And that’s not unique to the most recent drop. During every market correction, crash, and down day, there are certain stocks — and entire sectors — that outperform.

Those sectors also outperform the market on the way back up. But, on the opposite end of the spectrum, there are sectors that tend to do even worse than the market during tough times.

So, before we either head back up or keep heading down, now is the time to make sure you’re allocating a solid chunk of your portfolio to stocks that’ll defend your profits against a crash and boost your gains when the market turns back around.

crash protection sectors 2008-2010

Plunge-Proof Sector #1: Technology

During the last major market crash, the S&P 500 dropped a massive 50% between February of 2008 and March of 2009. But, unlike in the preceding crash (the dot-com collapse), the technology sector outperformed the market during that drop.

The S&P technology sector still fell, but only by 40%. Still bad, but not nearly as bad as the broader market.

From a monetary standpoint, if you’d had $10,000 invested in a fund that tracks the S&P 500, you’d have only had $5,000 left. Half of your investment would be gone. But if you’d been invested in the technology sector, you’d only have lost $4,000.

It’s not great. You still lost money, but you were in a much better place when the market turned and headed back up.

And, as that bull market gained strength, the technology sector outpaced the S&P 500 by 25%! That’s a 443% gain in technology compared to a 350% gain for the market.

That’s the difference between a $10,000 investment growing to over $54,000 and growing to around $45,000. That’s $9,000 you could have used to pay bills or take a vacation.

Plunge-Proof Sector #2: Utilities

Similar to technology in performance during the Great Recession, the utilities sector also outperformed the market as it fell.

Utilities stocks tend to be relatively steady as far as price is concerned. But what makes them better as markets fall is the steady dividend payment. Investors may see losses when it comes to stock price, but they’ll be cushioned by the dividend payments.

And during the crash in the late 2000s, utilities dropped about 40% while the market shed half its value. So investors who allocated some of their portfolio to utilities stocks were already ahead of the pack when the recovery started.

But, unlike technology, utilities companies tend to underperform during a bull market. Investors can find bigger gains elsewhere, so the steady dividends lose some of their luster as markets swing higher.

During the bull market that followed the 2008 recession, utilities gained around 187% compared to the S&P 500’s 352%. So once the markets start to head back up, you’re wise to sell your defensive utility stocks and put your money into one of the other plunge-proof sectors.

Plunge-Proof Sector #3: Health Care

Now, this is truly a recession-proof industry. It’s like funeral parlors or alcohol and tobacco — except it deals in extending lives and not ending them.

No matter what the market is doing, there’s always a need for skilled health care. People get sick and need to get healthy. And we’ve got a massive generation that’s getting closer and closer to needing the skilled care provided by the health care sector.

Back in 2008, the S&P health care sector beat out the market and both sectors I’ve mentioned so far. It fell, but only by about 30%. In cash terms, that’s $3,000 off a $10,000 investment. Still a loss, but only about half as bad as what the rest of the market experienced.

And once the recovery began, health care stocks — already in a better position than other investments — followed the S&P 500 right back up. Since March of 2009, those investors are looking at about 350% profits. That’s the same as the S&P 500, but health care investors had a higher starting place. So, when you factor in the drop, too, they’re about 38% ahead of the S&P.

crash protection sectors 2008-present

Plunge-Proof Sector #4: Consumer Staples

Possibly the best performing sector during any down market, consumer staples is the sector to get your correction protection. It’s composed of companies that make stuff people need, not stuff people want. And it outperforms other sectors and the broader market during sell-offs because people don’t just stop buying stuff they need when times are tough.

Let’s think about it for a bit. There’s a market crash and an economic recession. Your investments all got whacked — not as bad as some because you allocated to plunge-protection sectors. And you’re not making as much money. Which are you going to pencil out of your schedule, brushing your teeth or buying a new TV? Would you stop taking showers to save some cash? Or would you put off buying some new tennis shoes?

Personally, I’m sticking with brushing my teeth and taking showers no matter how bad the economy gets. I might not take a vacation or buy new toys. But I’m going to keep buying things like laundry detergent, toothpaste, shampoo, and toilet paper.

And that’s exactly what people did during the last major crash. Consumer staples stocks managed to find a bottom after dropping only 26%. That’s the difference between losing $50,000 of your $100,000 retirement account and only seeing $26,000 slip away.

Any loss is bad. But when you lose about half of what the stock market dropped, you can call it a good day.

Staples, however, like utilities, are defensive stocks. That means they’re going to protect you from a drop in the market, but they’re not going to help you beat it on the way back up.

Since the bottom back in March of 2009, consumer staples are only up about 250% compared to the S&P’s gain of 350%. But when you factor in the crash, even investors who kept their cash in those staples stocks are up higher than the S&P.

Since February of 2008, the consumer staples sector is up 162% compared to 152% for the S&P. So even if you don’t get your money out before the bull market gets underway, you’ll still be sitting prettier than anyone passively following the stock market.

Bonus Sector: Rapid Recovery

Now, you’ve seen how the plunge-proof sectors can protect your profits during a drop. And you’ve seen how some of them will even maximize your gains in a bull market.

But there are also some sectors that do especially well when times are good. Obviously, all the sectors do well when the market is up. Some just do better than others. You know that utilities and consumer staples underperform in a bull market — they’re up, but not as far as others. And you know that technology and healthcare stocks outperform the market.

But there’s one sector that puts all the others to shame during bull markets like the one that followed the Great Recession. And it’s consumer discretionary stocks.

crash protection sectors 2009-present

Consumer discretionary stocks are pretty much the opposite of consumer staples. They’re companies that make things people might not really NEED, but really want anyway. Think TVs, vacations, fancy clothes, and restaurants. Basically, think of anything you wouldn’t buy if you were tight on money, but you would buy if you had a bonus to burn.

And that’s exactly why those stocks tend to outperform during a bull market. The economy is growing. Portfolios are profitable. Companies are giving raises and bonuses because they’ve got extra earnings to go around. So people have extra money to spend on things they might consider extravagant when times are tougher.

People start going on vacations. They buy that new TV or car. They go out to eat and go shopping for new clothes. They spend that extra money on things they want but don’t really need.

And you can see how much these stocks outperform by looking at the last bull market…

During the drop, consumer discretionary stocks shed even more value than the S&P 500. Not much more, but some. The discretionary sector clocked losses about 1% greater than the market during the crash.

But since then, wow, has it outperformed! It’s up a whopping 600% since March of 2009. Compare that to the 350% gain from the S&P, and you see what I mean about beating the pants off the stock market.

Consumer discretionary stocks performed better than every other sector since the Great Recession, and by leaps and bounds. The closest sector was technology, and discretionary still came in 36% higher.

History Repeating

Now, those are all examples from the last crash. But let’s take a look at how a well-allocated portfolio would have treated you this time around.

My fellow editor, Briton Ryle, and I run an investment advisory service called The Wealth Advisory. And our strategy hinges on picking stocks that will outperform in any market conditions.

Since the service was founded back in 2008, we’ve beaten the S&P 500 every single year. In fact, during the depths of the Recession, our portfolio was up nearly 30%. That’s while the stock market was down nearly 50%.

By the time the S&P went positive again, our investors had already banked nearly 300% in profits.

And that’s got a lot to do with the way we allocate our portfolio. We look for companies, industries, and sectors that outperform in bull markets and provide a cushion during corrections and crashes.

And this correction just showed how valuable our strategy is — especially when the market heads down.

The Wealth Advisory portfolio dropped with the market, but not nearly as far. In fact, our stocks outperformed both the Dow and the S&P by double digits. On Monday, the worst single day of the drop, our investors were 27% ahead of the Dow and 20% above the S&P 500. As of yesterday, The Wealth Advisory portfolio was outperforming the Dow by over 34% and the S&P by nearly 33%.

twa vs markets

Investors who followed The Wealth Advisory strategy saw their portfolios take a much smaller blow than the stock market. So, while their profits did fall, our members are sitting in a much better place when the tides turn.

Beating the market during a downturn is great. But what’s even better is outperforming on the way back up. And that’s exactly what The Wealth Advisory portfolio did.

On Tuesday, it looked like the bloodbath was over and markets were going to start heading back up. And they did. At least, they did on Tuesday.

But since then, they’ve been struggling to gain footing and figure out which direction to go. On Wednesday, markets dipped slightly but basically finished the day where they’d started. And as I wrote this article yesterday, the Dow suffered another +1,000-point drop.

But The Wealth Advisory portfolio turned the corner on Tuesday and maintained that momentum through the day on Wednesday.

twa rapid recovery

Now, after yesterday's shellacking, The Wealth Advisory portfolio erased some of those gains. But its reversal was nowhere near the fate the markets suffered.

twa plunge proof

And that’s exactly what you want from your portfolio. You can’t time the market and get out at the absolute top. And you aren’t going to be able to pick the bottom, either.

So, you make sure you’ve got stocks that will soften the blow when the market drops. And you make sure to add stocks that outperform when the market turns and heads back up.

That’s how you win at Wall Street. And that’s what we do at The Wealth Advisory.

So, if you want a little help picking the top stocks in those plunge-proof and rapid-recovery sectors, it might not be a bad idea to take The Wealth Advisory for a test drive.

Trust me. When the next correction or crash comes around, you’ll be counting your blessings.

You’ll watch the world panic while you go shopping for more market-beating stocks. And when things start looking better, you’ll be in the absolute best position to start racking up the big gains again.

To correction protection and rapid recovery,

jason-williams-signature-transparent

Jason Williams

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After graduating Cum Laude in finance and economics, Jason analyzed complex projects and budgets for the U.S. Army. Then, at Morgan Stanley, he led the assistants' team for the North American repo sales desk, responsible for hundreds of multibillion-dollar trades every day. Jason is the assistant editor for The Wealth Advisory income stock newsletter. He also contributes regularly to Wealth Daily. To learn more about Jason, click here.


IN CASE YOU MISSED IT

The past week's market sell-off is due to the coming global trade war, and nothing can stop it. President Trump’s seeing to that.

And before it’s over, it’ll tip the world into a financial crisis the likes of which we haven’t seen since FDR.

Countless banks will go under... unemployment will skyrocket... and the stock market will crash, just like it did during the Great Depression.

But a few prepared investors will quietly gain financial independence from it all... just like they did 80 years ago.

My colleague, Christian DeHaemer, put together a quick presentation that will show you exactly how they did it... and how you can, too.

Click here now to see it.

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