Risk Alert: Business Cycles About to Collide
It’s time for all stock market investors to re-evaluate their portfolio risk.
If a new bull market happens to develop, it’s easy to jump on the bandwagon. But with so much uncertainty and risk out there—risk that is 100% beyond your control—equity investors need to be safe.
There is always room for speculation with play money, but when it comes to money being used to save for retirement or dividend income being used while in retirement, capital preservation is absolutely key.
Utility stocks immediately come to mind when I think about capital preservation and the stock market. This is a sector that is often used to generate income for those who are in retirement.
Surprisingly, some utility stocks have actually been very good wealth creators in terms of capital appreciation. Like always, which individual companies you own matters. This is why the returns from mutual funds can be so mediocre. Diversification works, but always has a cost.
Looking at utility stocks, trends are important—trends in population growth, migration, or in things like power usage from industrial customers. Just look up a utility stock index and the stock market charts of those companies. You can see which companies are the standout players, and why they are because of migration trends in demand.
Another stock market sector that offers some safety and the opportunity for capital gains and decent dividends is energy. But in the oil and gas business, size counts.
A company like Chevron Corporation (NYSE/CVX) has proven to be a reliable stock market performer and dividend payer. It is an ideal retirement stock. And even with the amazing growth taking place in Bakken oil and gas, big oil eventually just buys the best players. They have the money, that’s for sure.
Finally, another stock market sector offering relative safety is consumer staples. It’s a sector that is often favored by investors saving for retirement.
This group has been leading the stock market’s performance since the beginning of the year for the simple reason that institutional investors wanted to buy the safest names.
But even with companies like Colgate-Palmolive Company (NYSE/CL) or The Procter & Gamble Company (NYSE/PG), these stocks can get hit hard and stay down for long periods of time. They offer dividend consistency and dividend growth, but the stock market is all about one thing—relative valuations.
The amount of investment risk that is now prevalent in the world is unprecedented. Massive amounts of sovereign debt, currency devaluations, monetary stimulus, and a lack of fiscal control by governments really make for a dangerous landscape. Individuals’ retirement plans are at stake.
And artificially low interest rates have killed risk-averse retirement savers. Whether you’re in retirement or saving for retirement, there are very few options to consider aside from the stock market. Even if you own real estate investment trusts (REITs), you are still vulnerable, because REITs are equity securities.
And that’s the key. Equities are risky assets. So, if you’re re-evaluating your portfolio, I urge you to take a strong look at your holdings in terms of your exposure to risk. A number of economic cycles are about to collide.