Editor’s note: US stocks fell hard yesterday and many of you have written in worried about a market correction as we head into what’s sure to be an emotionally charged election season.
So today, we’re sharing an important excerpt from a recent issue of our flagship Disruption Investor service. In it, editors Stephen McBride and Chris Wood explain why they recommend buying “insurance” for your portfolio now, in what might be the calm before the storm…
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From the August issue of Disruption Investor:
The S&P 500 is having its 13th best start to a year… and its best-ever start to a presidential election year.
Congratulations to Disruption Investor members who beat the market so far in 2024. Our portfolio gained 23% through the first seven months, while the S&P 500 is up 15%.
The CEO of Goldman Sachs has said the key to a successful career is “stepping in the right elevators.” No matter how talented you are, the industry you choose to work in really matters.
Same for investing. Which companies you own really matters.
That’s why we only invest in great businesses profiting from disruptive megatrends. It tips the odds of success heavily in our favor. Only stocks that hit the sweet spot in the middle of our Venn diagram can make it into the Disruption Investor portfolio.
Almost three decades’ worth of collective investing experience has taught Chris and me that if you pick great businesses profiting from disruptive megatrends… the rest takes care of itself.
Our research suggests we’re in the middle of a long-term bull market. But no matter how bullish we are, we still invest like we might be wrong. Let me explain…
First, don’t lose sight of why we invest in the first place. We invest so we can live comfortably… give our kids the best possible opportunities… enjoy wonderful vacations… and eventually live fulfilling retirements.
We invest to build lasting wealth.
We’ve made a lot of profits in the stock market over the past 18 months. To make the most of the new wealth you’ve generated, you must avoid significant losses.
In my experience, this is the #1 thing that separates investors who grow rich from those who see mediocre results. There are a lot of “one-hit wonder” investors who strike it big during a stock market rally... only to give it all back on the other side.
We must respect the market and remember: stocks fluctuate. The S&P 500 has hit 38 new highs so far this year. It won’t always be this easy to make money.
That’s why now is a good time to put on a “hedge.” Hedging is a strategy we can use to reduce the risk of losing money. It’s like buying insurance for your investments.
There are various ways to hedge your portfolio: put options… shorting stocks… inverse ETFs… buying “volatility.”
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Some investors also consider assets like gold, bonds, and bitcoin (BTC) to act as safeguards if the market takes a dive. We consider these assets important diversifiers, not hedges.
There’s a lot of misunderstanding about what a hedge is… what does (and doesn’t) make a good hedge… and where it fits into your portfolio. This month, we’ll show you everything you need to know.
We believe every good hedge is relatively cheap to implement and easy to manage. We’ll walk you through how to take advantage of our strategy below.
With stocks near record highs, insurance is cheap right now. And you want to buy insurance when you can, not when you’re forced to.
“I wouldn’t be surprised if stocks sell off heading into November’s political Super Bowl.”
That’s what I wrote back in January. And with 96 days left to go, all eyes are on the US presidential election.
Remember, stocks typically go up in election years. Since 1928, US stocks were positive 90% of the time. We can add 2024 to that list.
What gives us pause is that the biggest decline for the S&P 500 is 5.5% so far this year. This is historically low and suggests we’ll likely see a larger pullback at some point before November. The average election-year dip is 13%.
Historically, these selloffs tend to happen in the weeks before election day as investors get antsy.
Our loose “script” is for stocks to experience a sharp pullback heading into November… followed by a rally after the die is cast.
We want to get ahead of any volatility by buying downside protection now, while it’s cheap. As the saying goes, “Buy umbrellas when the sun is shining.”
We’re investing from an enviable position, having outperformed the market. It’s wise to protect our gains.
Buying stock market insurance also gives us peace of mind. Like home insurance, we hope it never pays off. But it’ll allow us to navigate potential volatility with confidence. It also means we can stay invested in great businesses through market turbulence.
That’s where our edge is: owning great, disruptive businesses in long-term megatrends. Over a multi-year period, the companies we own will continue to power ahead, no matter the political situation.
But in the short term, even great stocks can be tossed around in emotional waves, which we’re already starting to see.
Many of you told me you’re worried about a market correction. Disruption Investors don’t worry; we act. That’s exactly what we’re doing this month.
Being prudent in times like these will let you come out on top no matter where the market’s headed next. Chris and I will be here to guide you every step of the way.
[Disruption Investor members can continue reading the issue here. If you’re not a member and would like to access this trade, go here to upgrade now. The guys also shared important guidance on Nvidia (NVDA) yesterday, and their newest issue will publish tomorrow at 4 pm ET.]
