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5 Safe Investments in a Stock Market Crash | Investing in Stocks - YouTube
Channel: Let's Talk Money! with Joseph Hogue, CFA
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Stocks plunged last week and if history is
any indication, we could be in for a drop
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of at least another 8% and up to half of stock
prices could be wiped out before it’s over.
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We haven’t had a bear market in a decade,
even though it’s happened about every six
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years in the 40 years to 2008.
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We haven’t had a drop of 5% or more in stocks
for three years, even though that’s happened
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on average every two years for the last five
decades.
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In this special video I’ll show you why
the stock market has been on edge lately,
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the two primary reasons stocks could be in
for a major crash, as well as one reason that
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nobody could see coming.
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I’ll also be sharing five investments I’m
using in my personal portfolio to protect
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my money and grow my nest egg even if the
rest of the market collapses.
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These five investments don’t move in lock-step
with stocks so it could be the opportunity
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you need to save your portfolio from the coming
panic.
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Along with all that, I’ll be doing a live
Q&A with this video and answering all your
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questions right here on YouTube.
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Joseph Hogue here with a very special video
on the Let’s Talk Money channel.
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We’re trying something new with this video,
a live Q&A session to answer all your questions.
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I love the interaction here on YouTube and
by doing live Q&A sessions, we can get all
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your questions answered in real time.
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So check the comments below for the time and
date of the live Q&A but I’ll also be checking
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in regularly to answer any questions afterward
as well.
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We’re going to be doing these a lot this
year so subscribe to the channel so you don’t
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miss your chance.
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Today’s video is something that’s always
on investors’ minds but just got real last
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week with a 4% plunge in the stock market.
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That was the worst week in two years and the
Dow dropped almost 700 points on Friday, something
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it’s only done 17 days before.
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Now I’m not saying the stock market is heading
lower for another crash.
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This bull market is the second-longest in
history and stocks are ridiculously expensive
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but that doesn’t mean it all has to end
this year.
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But it will end.
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Just the nature of the markets and our economy
means there will be booms and busts.
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People like to believe in the good times that
stocks will always go up but it just doesn’t
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work like that.
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I pulled 50-years of stock market prices to
find all the corrections, moves of more than
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5% lower, and all the bear markets of 20%
losses or more.
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There have been 26 corrections and six bears.
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Just the corrections, which have happened
about once every two years, have posted an
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average loss of 12% and the bears have destroyed
an average of 42% in stocks.
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Last week’s loss was just 4% so if it does
become a correction, that means we could have
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another 8% farther to go.
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But that doesn’t mean you have to lose money.
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In fact, now could be a great opportunity
to protect the gains you’ve made over the
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last eight years and make more money even
if the market tumbles.
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It’s all about recognizing the factors that
could drive a crash in stock prices and finding
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investments that won’t drop because of those
factors.
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So I’m going to share a few of those factors
I’ve been watching that are going to crush
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stocks whether it’s this year or next then
I’ll show you five investments that will
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hold up and even grow your money.
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If you like, you can fast forward ahead to
those five investments but understanding these
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factors is going to be really important in
finding other investments and understanding
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why the market is crashing.
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The truth is that the factors that drive a
crash are pretty obvious before the fallout.
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The only question is when it happens.
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I’ve worked as an economist and have seen
these signals many times before.
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First, the federal reserve is raising interest
rates.
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The Fed helps to control the economy through
its policy of borrowing and rates it sets
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for banks.
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If you look at a chart of the Fed’s assets,
which is like money it has increased in the
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economy from its own borrowing, and the stock
market, it doesn’t take an economist to
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see that all this stimulus really pushed the
market higher over the last decade.
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Now the Fed is taking that away.
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It’s increasing the cost companies pay to
borrow money, it’s increasing the cost of
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home mortgages.
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All this is going to slow down the economy
even against the new tax cuts.
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We’re also seeing the beginning of inflation
in wages and prices for the first time since
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2011.
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All those companies announcing wage increases
and bonuses is good for workers but its going
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to weigh on those company profits and it won’t
be long before it forces layoffs and cost-cutting.
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They say you can’t be a little pregnant
and you can’t have a little inflation.
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I’ve been following inflation in energy,
imports and a few other areas over the last
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year and it’s going to be the surprise event
this year.
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Those are the two big factors that could dump
stock prices but another is international
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trade.
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It’s a huge unknown and could lead to a
selloff at any moment.
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I’m not making a judgement call on the fairness
of trade deals but this is a machine and anytime
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you start tinkering with a machine while it’s
running, you’re going to lose a finger.
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So now that we have an idea of why the market
could plunge, we can look for investments
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that might not be exposed to these forces.
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These are investments and asset classes that
don’t move in lock-step with stocks and
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will smooth out your returns so you don’t
freak out when stocks crash.
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I’ve found five investments that will continue
to give you positive returns this year and
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next even as stocks hit a wall.
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I’ll talk through each of these here and
leave links to more detailed articles in the
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description to the video.
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First is investing in peer-to-peer loans on
Lending Club.
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I’ve been investing in p2p for a few years
now and have booked returns just under 10%.
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Now that might not sound great against double-digit
stock returns but it’s double what you get
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from other fixed-income investments.
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Investing in loans is nothing new.
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In fact, I guarantee you already have money
in them through any pension plan or insurance.
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You see banks sell their loans to investors
that need reliable cash flow so their biggest
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buyers of loans are pensions and insurance
companies.
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With p2p, you cut out the middleman and become
the bank yourself for higher returns.
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Peer Lending is like bond investing but since
most of the loans are only for three years,
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they don’t lose their value when interest
rates increase.
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In fact, as rates increase, the rates on loans
will increase as well and returns for p2p
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should hold up well.
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P2P loans aren’t totally immune from an
economic recession.
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There will be higher loan defaults but your
returns are still going to be positive if
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you invest in high-quality borrowers.
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I’ll share the criteria I use to pick loans
in an article and link to it in the description
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below.
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Using these loan-picking factors, I limit
defaults even if the economy slips and keep
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collecting payments even as stocks drop.
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My next investment to protect from a market
collapse is real estate crowdfunding.
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Now I started my professional career as a
commercial real estate analyst and I’ve
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managed my own rental properties so real estate
has always had a special place in my portfolio.
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No other asset has created as much long-term
wealth as property.
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There are a couple of problems with direct
investment in real estate though.
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It’s expensive to buy even a single property,
a minimum of tens of thousands of dollars,
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and there’s no way most investors can build
a portfolio of different property types and
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in different regions to protect from those
risks when you have all your money in just
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one or two investments.
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Besides that, managing your own properties
is a constant headache with tenants and repairs.
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So real estate crowdfunding is just the crowd
meets real estate investing.
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Developers and investors list their properties
on a crowdfunding platform that reviews the
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investment and the project owners.
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This is a detailed review and only about 5%
of the projects ever make it on to the RealtyShares
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platform which is where I do most of my investing.
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You can invest as little as $1,000 in each
property which means you can build up a portfolio
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of different property types and in different
areas for that diversification.
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You also get professional management of the
projects.
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The project owners send all debt or equity
payouts through the platform and it gets passed
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on to investors.
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Since these are longer-term projects, short-term
market hiccups shouldn’t affect them.
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Real estate prices may follow the economy
a little but there is still that natural demand
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from homeowners and commercial users so that
supports prices.
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I surveyed real estate crowdfunding sites
on returns and found that debt investments
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average around 9% while equity returns average
15% annually.
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I invest in real estate debt on PeerStreet
and in debt and equity on RealtyShares.
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I like investing on more than one platform
because it gives me access to as many deals
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as possible.
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Next on our list of safe investments is shares
of utility companies and telecom companies.
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Both of these sectors have stable demand that
doesn’t follow the economy up or down.
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You aren’t going to turn off the heat or
stop using your cellphone in a recession.
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Now you see that shares of utility companies
also fell in the 2008 crash but not as much
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as the overall market.
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Plus, these companies are cash machines and
pay higher dividends to investors.
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So if you were investing in the Utilities
Select Sector Fund throughout the market crash,
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you would have collected a dividend return
of three to four percent.
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That dividend is always a positive return
and the shares of these companies bounce back
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fast because of that steady demand.
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Both utility and telecom companies are also
going to be big winners in the tax cuts because
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the sectors were paying some of the highest
corporate rates before the cuts.
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They also invest billions in equipment every
year and that is cheaper now under the tax
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cut as well so I’m looking at these two
sectors and the funds that cover them to do
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very well this year.
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On that real estate theme is our next investment,
real estate investment trusts or REITs.
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These are stocks of companies that hold mostly
commercial real estate and pass the cash flow
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on to investors.
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They also get a special tax break because
the pass most of their profits on to investors
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every year.
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You can see that REITs also aren’t totally
immune from a recession but those high dividend
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payments are always a positive return.
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Since they pass on almost all their profits
to shareholders, REITs pay a higher dividend
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than most other stocks actually about double
the dividend on the stock market.
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Even in the real estate crisis of 2008, REITs
have returned an average of 13.5% over decades.
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That’s well over the average return on the
stock market and almost 8% of that is an income
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return from dividends.
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Whenever the stock market tumbles, you want
to be holding as much of your money in different
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assets as possible.
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That means asset classes like bonds and real
estate so three of our investments here, those
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peer-to-peer loans and real estate investments
fit this diversification that’s going to
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protect you from the stock market.
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Our last investment here is shares of gold
miners.
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Now you’ll see a lot of commercials and
advice to invest directly in gold when the
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stock market crashes.
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That’s because gold is a safe haven investment
and holds its value.
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But I don’t like investing directly in gold
because it means you have to time the market.
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It doesn’t pay a dividend and really doesn’t
produce anything.
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All of your return depends on buying low and
then selling high.
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Gold miners on the other hand will benefit
when gold prices increase during market crises
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but they also pay a dividend and produce profits
on their production.
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That means gold miners are going to be creating
value for their investors.
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Even if the price of gold comes back down
when the market steadies, that value created
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will still be there and you can sell your
shares for a profit.
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Now I’m not talking about taking all your
money out of stocks and putting it in these
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five investments.
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We’re not trying to time the stock market
here, just shift our exposure to assets that
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won’t crash along with the market.
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That means taking a portion of your money
and putting it in these safety investments.
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If you’re like most investors, you probably
have very little in any of these.
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Maybe you own some shares of utilities and
telecom companies but most investors have
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less than a fraction of their wealth in these
five investments.
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I’ll keep watching the market and updating
you on how to manage your money.
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We’re here every Monday through Wednesday
with a new video on beating debt, making money
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and making your money work for you.
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Be sure to subscribe to the channel.
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It’s free and you’ll never miss a video.
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If you’ve got a money question, subscribe
and go to mystockmarketbasics.com/ask and
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I’ll answer it in a future video.
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