In Times of Crisis, Add Some Discipline to Your Portfolio

Dishing out advice on financial staples in times of crisis used to involve three servings: precious metals, U.S. Treasury bills and real estate.

With the tumult on Wall Street having changed the financial world – investment banks are going the way of rotary-dial phones – the usual recommendations aren’t adequate.

As Congress seeks to leaven the risks of under-regulation, toxic debt and systemic collapse, traditional hedges might not protect your nest egg. Let’s assume any bailout legislation will put only a modest dent in the U.S. home foreclosure crisis and won’t dramatically lower mortgage rates.

Interest rates are more likely to rise in the long term as the government peddles $700 billion or more in debt to pay for this Faustian rescue. The final tab is unknown, but it’s always more than what officials in Washington project. That casts a pall on home values, sales and the industry’s recovery.

That leaves assets such as stocks, bonds and metals. Unless inflation soars, the conventional wisdom might be perilously wrong on how to best insulate your portfolio. I’m always perplexed with the first crumb of conservative investment philosophy: Precious metals are the best haven in times of calamity.

That has always puzzled me. Metals such as gold and silver bullion don’t pay dividends, aren’t backed by anything and are mostly held in large quantities and traded by huge institutions. Individuals usually don’t stand a chance trying to successfully time the metals markets.

Gold bugs have always touted precious metals as the last immutable store of value in a crisis. In Wall Street’s most terrifying week since late 1929, during a brief shining moment, gold was once again favored as a haven.

As a volatile commodity, though, investing in gold isn’t for sissies. After the spot price reached a record this year of almost $1,000 an ounce, it fell to $736 on Sept. 11. Then it gained more than $100 an ounce during the week ended Sept. 19. You need a strong stomach to buy something that fluctuates more than $200 in price in a short period of time.

Most people can’t buy bullion on the spot market, so they might invest in a vehicle such as the SPDR Metals & Mining exchange- traded fund, which samples several metals mining stocks. The fund has fallen about 20 percent this year.

If gold doesn’t work as a stable retreat, should you be jumping out of common stocks into another asset at all? As an individual investor, it doesn’t make sense to me to leapfrog from one asset class to another.

Just when you thought you had made the right decision, the market turns. Most people guess wrong, time badly and lose money consistently. They hold on when they should be selling, praying for a comeback. We are hardwired to be optimists. U.S. Treasury securities are usually thought to be the best receptacles for safe money. Yet, when institutional investors retreated to Treasury bills in auctions during the week of Sept. 15, real returns were negative after you subtract inflation.

While you got government guarantees on your principal, T-bill yields were less than 1 percent. If most of your holdings are in U.S. dollars, you’ll also need to hedge currency risk. Non-U.S. stock and bond funds and oil and gold stocks will help. I have previously advised against buying metals, but if you are bearish on the dollar, gold can be a hedge. Buy and hold it in a mutual or exchange-traded fund.

Diversification is important. It doesn’t concentrate your portfolio risk in one country, asset, market or property.

The most important issue isn’t what will happen to the leading financial institutions in the coming days. Although unbridled avarice is at the core of the current mess, each time a financial crisis surfaces, the knee-jerk reactions attract far too much attention. One reality always registers: If you need money within the next five years, you have no business being in volatile and uninsured assets. All risk is personal, no matter how you slice the investment pie.

John Wasik is a Bloomberg News columnist.

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