What To Invest In If The Stock Market Crashes?

There is always a question on the mind of fearful investors, or investors that have previously lost money. Or perhaps astute investors that like to plan ahead. What do I invest in to protect myself against market crashes? What do I invest in? There’s all sorts of youtube videos, doom and gloom newsletters, and people claiming the sky is falling. Some of them have a very good case, others are masters at using information to scare people… And conveniently, they claim to have all the answers for only a $3000 private course (or whatever the going rate is), or a subscription of hundreds of dollars a month. For most people this is a valid concern. There are several ways to protect yourself against a market crashh. Doing so may decrease the amount of money you make if you actually expect the market to go up, and investing in these things are usually a bad idea, as you are probably going to be better off having cash or more sophisticated put options, but for some neither of those options are practical or available, so these still remain a valuable vehicle worth mentioning, and that is inverse ETFs.
ETFs are exchange traded funds that generally track broad market sectors, or market indices themselves. Inverse ETFs track the inverse of the ETFs performance as the name implies.

Warnings against Inverse ETFs are that they usually track the daily or rarely the monthly returns. Therein lies the problem. If a stock is at $100 and it drops 20%, and then it gains 20% there is slippage. 20% increase from 80 brings you to $96 and you are down. Take this effect over several months, or years and you are magnifying the problem. As such, unless you have great market timing methods and believe you can outsmart the brightest minds in wallstreet that work together as a team putting more money in it than anyone else, it’s probably wise to consider other options.

Diversification is said to do well if market crashes, however this is not completely true. If people invested in stocks sell one stock to buy another it should work fairly well, ignoring the threat of deflation. But what happens when people start selling stock to buy houses? What happens when stock investors become real estate investors? or commodity investors? Then the money flows out of every sector in the stock market for the most part. The saying “there’s always a bull market somewhere” may be true, but that doesn’t mean it’s always in stocks. As such you should consider using ETFs in multiple asset classes., as well as cash on the side to really protect yourself against a crash.

Consider the following portolio

10% currecy ETFs
10% cash/other currencies
10% real estate ETF
20% SPY index fund
20% commodities
10% precious metals
20% bonds

Such a portfolio would be protected against lost value in the market due to both inflation or deflation as well as protection against outflows from one asset class to another.

As a general rule of thumb:
Bonds and cash and all things tied to cash do well during deflation and forced liquidation which typically occurs during market crashes. Things become cheaper, people flea to cash, cash becomes king, and they buy bonds and are more willing to flea to safety.
Foreign currencies do well in localized inflation.
Real estate and stocks do well in a healthy economy.
Commodities and precious metals do well in inflation and credit expansion as well as during “manias”.

Awhile back I ran a case study on a multiple asset class diversified study. It should some pretty surprisingly positive results considering how much “balance” it had, and considering there was even an ultra inverse ETF in the initial study that did terribly that brought down the data.

This strategy works because there is constant inflows and outflows of money. As money flows into say precious metals, it outperforms and starts to do really well. As that happens, you will have to sell to rebalance your portfolio to maintain the same balance. By doing this you gain from month to month fluctuations in the market, while maintaining protection from major market swings.

As the national debt increases, more bonds are printed to pay the federal reserve, and more cash and credit is produced. That money will in turn get used to take on loans, and more money gets put into the system. Even as society produces more, which makes things cost less to produce and less value is required, the increase in credit and money supply increase the cost in dollars and decreases the value of money. As such, there generally is going to be money that flows from one area to another.

Does gold protect me from a market crash?

There is a common myth that gold will protect you from a market crash. It is a myth because although during the depression, gold performed well, gold ldid not do well because gold always benefits from inflation. Gold did well because back then, the dollar WAS gold, and as such, during market crash, stock becomes more affordable in terms of dollars, and people fled to cash as well as gold. There was fear of a run on the banks, which back then not only had the isue of there not being enough cash available, but if people didn’t receive the cash, they wanted to exchange the cash in their accounts for gold if the cash wasn’t available. Now that does not mean that gold won’t occasionally do well in a market crash. Often people are selling stocks because they either want to buy something, or they need to pay off debt and margin calls,etc (there is consolidation of all the IOUs causing people to raise cash).

Also, gold will do well in an “inflationary crash”. An inflationary crash is very different, it is when prices only go down slightly at worst, but possibly stay the same or go up, but inflation occurs at a faster rate. As such the real value priced in purchasing power of the stocks go down, even though the price may go up. When this happens gold and silver may be the best investments.

Overall, don’t trust that any one asset class will always protect you in every situation, that is a myth usually by the people that are selling you what they advise you to buy. Real estate agents say financial security can only be built through a home, stock brokers will say “buy stock to protect your wealth” gold bugs will say “buy gold”. Generally people have a motive for pushing some stock or doing the opposite and saying the market’s going to crash.

You should at the very least take some money and put it in various asset classes. You can do this through ETFs, although I suggest having some physical precious metal as during a major financial panic, having shares of a gold ETF held by a bank that just enter under, or held in a brokerage account that goes under due to too much leverage or physical cash in a bank when a bank goes under, wouldn’t really help you. Your money would probably be repaid by the FDIC but by the time you get paid, if there are other people panicking most likely inflation will have taken over. So always keep SOME physical cash and some physical gold somewhere in a safe or in your house. It is decisions like this that will help you sleep well at night, but also protect your wealth in multiple assets, and grow it by taking profits every now and then in your positions that are up, and adding to assets that are down, to maintain the balance in your portfolio and profit from volatility.

What etf goes up if the market crashes?

An alternative view is to actually bet against the stock market. The stock market will crash if money either flows out of stocks as an asset class, and/or if deflation occurs and in some instances, if there is some panic selling that results in forced liquidation. An inverse etf such as the one’s available through proshares allow you to bet against the stock market, against individual sectors in the stock market, or against individual asset classes like bonds, real estate or metals..