6 ways to protect your portfolio after debt deal

August 2, 2011

With the U.S. debt ceiling crisis: It “ain’t over ‘til it’s over,” to quote my favorite philosopher Yogi Berra. And this one is definitely not over by a long shot.

Some $1.5 trillion in cuts in federal programs will be considered toward the end of the year. Credit agencies may still downgrade U.S. debt. And the harsh plan may ultimately damage the floundering American economy. Fortunately, you have time to protect your portfolio before another politico-economic reign of terror ensues.

Start with an assumption that the markets may frown on U.S. debt and the dollar in general. And there may not be much – if any – significant economic growth in the U.S. for some time. Here are six key portfolio themes that you can consider to bolster your portfolio and insulate it from global debt woes.

A bear market in U.S. bonds. The bull market that got its start in the 1980s may be at the end of its run. Will inflation or investor insecurity trigger a flight from what was seen as the safest debt in the world? If you’re really nervous about U.S. Treasuries, trim your holdings in the longest-maturity notes. To hedge against interest-rate risk depressing government bond prices, consider the Direxion Daily 20+ Year Treasury 1x Shares exchange-traded shares. If the index linked to these bonds goes down, the value of this ETF goes up.

A bear market in the euro and dollar. There’s no easy resolution to Eurozone and U.S. debt dilemmas. Are there “safer” currencies relative to the buck and Euro? You can either buy stocks or AAA-rated bonds in some of the better fiscally managed countries such as Australia, Canada and Switzerland, or currencies from those countries. A more precise way of hedging currency risk is to find a country like Switzerland that’s seen as relatively secure and invest in an ETF such as the CurrencyShares Swiss Franc Trust.

Dividends rule. Not subject to partisan wrangling or sovereign debt debacles, corporate dividends are based on real earnings. Most consistent dividend producers are multinational companies that derive their profit from global enterprises. To find a pool of regular dividend payers, invest in an ETF like the SPDR S&P Dividend ETF. The fund tracks a group of dividend “aristocrats” selected for their consistent payouts over time.

Emerging markets bonds. Though not in the same league as U.S. Treasuries – that may change – bonds issued by developing countries are worth eyeing for diversification and higher yield. The WisdomTree Emerging Markets Local Debt ETF tracks an index of such issuers.

Global real estate. While residential real estate markets in the U.S. and parts of Europe might be in the doldrums, that’s not the case everywhere. You can find decent yields in commercial real estate across the world. The SPDR Dow Jones Global Real Estate ETF provides international diversification.

Commodities will still be in demand. Developing countries like China and India have voracious appetites for raw materials. While investing in individual countries that provide them – Australia, Brazil, Chile – is one idea, a broad-based commodities index will spread out country-specific risk. The Powershares DB Commodity Index tracking fund is a worthy choice.

Keep in mind that a global recession is still a possibility, and the debt-reduction plan may trigger a double-dip U.S. recession. The agreement did nothing to create jobs and will likely result in loss of employment in federal agencies.
All of my choices carry some degree of risk that is multiplied during economic downturns. If you can’t afford any loss of principal, hasten a retreat to something ultra-secure such as federally insured certificates of deposit or money-market accounts.

Governments from Washington to Brussels are now in the “break-it-you-own it” phase of a global debt crisis. They’re trying to get out of fiscal china shops without wrecking entire social safety nets. It’s not entirely possible to avoid the  mayhem, but there are some reasonable places to duck and cover in the interim.

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