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Stock Market Crash Coming? - Here's How to Protect Our Investment Portfolios - YouTube
Channel: Learn to Invest - Investors Grow
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Hi I'm Jimmy in this video I'm
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going to walk through some different
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ways we could protect our portfolio
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if we believe a stock market crash
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is likely to happen now
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there are a few different ways to
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hedge a stock portfolio
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and the one we choose or the
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combination we choose is likely
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to be based on a couple of different
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things.
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First our risk tolerance
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and then our confidence or the
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likelihood of a stock market
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crash in the near future.
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OK so the first very real
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possibility is not the hedge at all.
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Let's imagine that we have a
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portfolio that were dollar cost
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averaging in and dollar cost
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averaging is when we buy a given
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dollar amount the same dollar amount
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at different time periods.
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So let's say every month or every
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quarter we invest the same amount.
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Well this strategy
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alone is a way of hedging
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in its own right because if the
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stock market falls well you'll just
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buy more shares at a cheaper price.
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So if that's the case we might not
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need to hedge at all but let's say
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we want to be a bit more strategic
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than that. What can we do.
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So I'm going to walk through a
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couple of choices and beyond
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just mentioning the strategy
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I think it makes more sense to
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look at how each of these would have
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performed in actual stock market
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crashes.
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That way we can determine which
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one will help us most in our
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portfolio.
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So let's start with adding defensive
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holdings to our portfolio.
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Now oftentimes this can mean adding
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holdings that are typically thought
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to do well in down markets defensive
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industries like utilities health
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care or consumer staples
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are believed to do well in a down
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market.
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Bonds are often considered quite
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defensive as well.
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So how about we start
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by looking at both the Great
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Recession and the tech bubble
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to see how each of these groups
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performed in those time
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periods and then we'll jump on to
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other portfolio hedging ideas.
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So this is what the S&P 500 did
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in the early 2000s when the tech
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bubble happened.
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And as we could see this is a high.
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And this is the low.
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So how about we switch up this chart
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to just start at the very highest
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point and end at the lowest point.
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Now this is what that chart looks
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like. Now you may notice that I have
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this chart scaled starting
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with 100 value and you
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may notice that the S&P is down here
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at the bottom at fifty two.
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Well that's because the S&P during
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this time period was down about 48
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percent. So 100 minus 48.
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You end up with 52 value.
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OK. Now let's start with some
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comparisons.
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So this is consumer staples
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and as we could see consumer staples
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did significantly better than
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the S&P 500 did the S&P
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500 was down about 48 percent.
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Consumer staples were down like 3
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percent. Now all these numbers are
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in price returns meaning that
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they don't account for dividends.
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So the S&P was only down
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about 46 percent if we assumed
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that all dividends were reinvested
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back into the index and the consumer
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staples.
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That's for this I use the ETF
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X LP and that was
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it represents the consumer staples
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ETF and they were only
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down about a half a percent if
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you accounted for dividends.
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Okay now switching over to health
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care so we can see that health
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care did in fact beat the S&P 500
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although it wasn't as good as
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consumer staples when accounting for
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dividends being reinvested.
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Well XLV that's the health care ETF.
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They were down about 18 percent
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while the S&P 500 was down about 46
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percent.
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So they did good but not as good as
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consumer staples.
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OK moving on now we jump over exhale
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you which is the utilities ETF
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and XLU was down about 26
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percent.
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Yes it was better than the S&P 500
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but not as good as the other two
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each. Yes.
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Now I should point out when we look
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at this chart we can see a huge
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difference between the two lines.
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And one of the primary reasons for
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that is that utilities tend
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to be good dividend payers
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and we can't forget that this is a
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price chart.
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So they were really down about 33
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percent on the price chart.
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But when we consider the dividend
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perspective they were only down
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about 26 percent.
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OK on onto our last category
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investment grade bonds.
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Now I actually couldn't find an
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investment grade bond ETF
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that was trading back at this time
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but today there is LQD.
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And interestingly the index
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that LQD tracks which is called the
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ie box liquid investment
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grade index.
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Well they did have data on their
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performance for this time period.
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So that's what I ended up using.
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Now if we fast forward to the Great
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Recession. Well this is the S&P 500
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from the top in October of 2007
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to the bottom in March of 2009.
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So when we compare this to the
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consumer staples ETF Well once
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again the consumer staples ETF beat
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the S&P 500 and the S&P
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500 was down about fifty five
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percent and XLP was down just
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about 28 percent.
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When we switch over to health care
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what we can see that health care did
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outperform the S&P which would
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in theory mean that it would work
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as a hedge for our investment
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portfolio.
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Now XLV was still down
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a total of about 37
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percent during this time period.
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So yeah sure it would work as
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a hedge but it wasn't really a great
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hedge. Now when we switch over to
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utilities Well we can see a very
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similar story.
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They beat the S&P.
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So that's good.
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But as an investment hedge I'm not.
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Sure it worked all that great
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because this exhale you
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Well it was still down about 41
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percent. So sure it was a
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diversified.
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But it wasn't a great one.
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And this brings us to investment
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grade bonds now.
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This time LQD was live.
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LQD is an investment grade bond ETF
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so it looks like they were
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down about 11 percent during this
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time period.
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And that is true on a price basis
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but since they pay pretty good
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dividends on a total return basis
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they were down about 4 percent.
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Now to me that's much better
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if somebody had told us that we
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could invest at the top of the
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market and the market would be down
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more than 50 percent and we
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would be only down about 4 percent.
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Personally I'd be fine with that
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but can we do better.
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So one popular portfolio hedging
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technique is to use gold but
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does gold actually work as a hedge.
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Well this is gold during the tech
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bubble of the early 2000s.
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And yes gold held up quite
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nicely up about 13 percent
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as the S&P fell just short
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of 50 percent.
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When we switch over to the great
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recession once again
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gold did excellent up about 25
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percent while the S&P 500
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was down more than 50 percent.
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Now I do want to point out one fact
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about gold as a hedge.
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Yes it tends to be a very good hedge
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but not for many of the reasons that
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we often think it is.
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It's not really tied to the stock
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market at all.
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Instead it's really tied to
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currencies specifically
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the US dollar.
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So this is gold versus the US
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dollar during the Great Recession
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and as we could see they often
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move opposite of each other when the
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dollar goes up gold goes down and
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vice versa.
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Well why does this work as a hedge
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then. Well during recessions the
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dollar tends to weaken which is
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usually a good thing for gold.
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Now this isn't perfect
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every time. It doesn't always happen
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that way. In fact the International
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Monetary Fund estimates that about
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half of the movement in gold is
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explained by movements in the US
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dollar. So it's not exact
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but I just wanted to bring this out
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as a point for something else to
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consider.
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The real main point here is that yes
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gold tends to work as a hedge.
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Okay. Now onto our final hedge now
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one is using stock options.
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So there are a ton of different ways
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to use stock options as an
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investment hedge.
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Now options can be a bit more
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advanced and we really need to be
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sure that we're comfortable using
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stock options before we go ahead and
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put our hard earned money to work to
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very good stock option strategies
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are called protective puts and
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covered calls.
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Now we actually have more in-depth
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videos on each of these topics
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and these are really some of their
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simpler of the option investment
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hedging strategies.
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So if you're interested in learning
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more about either one of those have
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links in the description below for
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those two videos.
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So to keep this video from getting
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too long I'm just going to very
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briefly summarize these two
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investment hedging strategies
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if you're interested in seeing more
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options related videos.
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Let me know in the comments below
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because I'm actually a huge fan of
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options and it's something I studied
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a lot of and I really like them.
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So if you want to see more of those
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let me know in the comments but
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basically covered calls
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are good. If you want to grind out
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some additional income for a stock
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or an ETF that you already own
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while protective puts are good
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because you don't have to own the
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stock of the ETF and you make money
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if that falls.
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But they can get a bit expensive
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if you want to buy them for long
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periods of time.
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So my opinion is the smartest thing
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to do is to keep a diversified
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portfolio adding some gold
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could make sense as a hedge and
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adding some bonds would also
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probably help the portfolio a lot.
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Now I used corporate bonds in our
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example because they have
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the added perk of
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paying out semiannual
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usually semiannual income
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payments or dividend payments.
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Similar concept and
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this could be a good thing for our
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overall portfolio.
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Now if we wanted to add some options
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to the whole mix well that could be
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a bonus if we know what we're doing
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with them. So what do you think.
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How would you go about protecting
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your portfolio if the stock market
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crashes.
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Would you protect it at all.
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There's lots of choices and
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there's many different ways to do it
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based on the way our portfolio is
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currently set up.
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Let me know what you would do in the
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comments below I'm very curious to
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hear everybody's opinion on this.
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Thank you for stick with me all the
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way to the end of the video.
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They haven't done so yet.
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Please hit the subscribe button hit
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the thumbs up are seeing the next
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video. Thanks.
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