How to build the ultimate doomsday portfolio

Preparing for the worst could be the best financial move you've ever made. Here's why.

By StreetAuthority Aug 21, 2013 5:53PM
Stock market crash © Kyu Oh/Photodisc/Getty ImagesBy Joseph Hogue

We've managed to avoid the great Mayan prediction of the end of the world in 2012, along with countless doomsday prognostications before it. But while we shrug off the continued calls that some people still predict about the end of the world, it's undeniable there are good reasons investors should have a "doomsday portfolio" to protect them from catastrophic losses.

I'm not talking about the end of times, though. In the event of runaway asteroids or the second coming, saving for your golden years will be the least of your worries.

But I'm also not talking about simply a global malaise in economic growth or the gradual loss of purchasing power in the U.S. dollar, either.
 
I'm talking about a quick collapse of order -- a collapse of faith in our institutions and a resulting widespread loss in financial assets.
 
And if you think this could never happen, then think again.
 
Hurricane Katrina destroyed more than $60 billion in economic value and led to massive looting and a surge in energy prices. The once-in-a-century disaster was followed just seven years later by Hurricane Sandy, which caused damage that may cost up to $50 billion.

Officials in Japan, meanwhile, have found radioactive material in produce as far as 200 miles from the Fukushima nuclear disaster.

The point is, large-scale disasters -- man-made or natural -- seem to be getting stronger and more frequent.
 
Combine a few disasters with the collapse of a government or financial systems abroad, and you've got the makings for hysteria and catastrophic investment losses here at home. While stocks and other assets would eventually rebound, wouldn't it be nice to know that you are protected on the downside?
 
Peace of mind and reasonable returns
Devoting a portion of your portfolio to "disaster insurance" types of assets is not as difficult as it may seem. And it doesn't have to come at the expense of returns, either. Three key points can help you build a doomsday portfolio that will provide returns as well as peace of mind:
  • Own hard assets that can be used to store value, in the event currencies cease to carry popular support
  • Own shares of stable, defensive companies, with production and sales across multiple regions or countries, to diversify geopolitical risk   
  • Own assets that provide enough current income to provide a reasonable return on your money in the event the sun comes out tomorrow.
With these three key traits in mind, here's a list of ideas and the stocks that should help any portfolio survive a collapse during bad times, but also perform well during the good times.
 
1. Gold
The ultimate storage of value when the government is no longer able to back its fiat money and investors get nervous about the future... is gold. Gold is probably the biggest insurance-type bet in the portfolio. Like insurance, it may suffer losses or not add much unless the market comes down hard or if inflation jumps. You probably don't want a large portion of your portfolio in gold -- but if things get bad, you definitely want some exposure. Consider any losses on gold as you would an insurance policy: You wouldn't cancel your homeowner's policy because you haven't had a fire in a few years.
 
Gold can pay off on two doomsday scenarios: a jump in inflation or a spike in market fear. An investment in physical gold through the SPDR Gold Shares (GLD) has easily beaten most other assets during the past decade, but the fund pays no dividend. While I think the shares could edge higher and would surge in a crisis, I also want something that is going to pay me to wait.
 
That's why I also like Barrick Gold (ABX). It's the world's largest gold miner, with 26 mines in operation across five continents. This diversity in production insulates the company from unrest in any one part of the world. The stock pays a dividend yield of almost 1.1% and is not expensive, at just over eight times forward earnings.
 
2. Oil exploration and production
Even with alternative forms of energy coming into their own, the world still runs on oil. The United States still relies on petroleum for 40% of its energy needs, and that percentage is much higher in many other countries. If confidence were to be lost in global governments and currencies, then oil would be needed as a store of value and for use in production.
 
Chevron (CVX), the nation's second largest oil company, is the first to come to mind. The company has assets and sales all over the world and a strong 3.3% dividend yield.
 
I wouldn't put all my eggs in one basket though, so I also like the exchange-traded fund (ETF) Energy Select SPDR (XLE) for its 1.7% yield and diversification across 45 energy companies. The ETF carries an extremely low expense ratio of 0.18% and trades at a relatively cheap 13.6 times forward earnings of the companies held.
 
3. Water
You can live for weeks without food and shelter, but water becomes a necessity within just a few days. The Journal of Environmental Science & Technology estimates that 1 in 3 counties in the United States could face a high or extreme risk of water shortages due to climate change by the middle of the 21st century. Combine this trend of scarcity with an unforeseen catastrophe that wipes out some supply, and you've got hysteria on your hands.

American States Water (AWR) provides water services in 10 California counties, including drought-prone Los Angeles. AWR just recently increased its dividend by 14% and making it 59 years of dividend increases. The price-to-earnings (P/E) ratio of 19 is significantly above the industry average of 14 due to AWR's strong fundamentals and yield.
 
Aqua America (WTR) could diversify your water exposure through 12 other states in the U.S. and across other water and wastewater service providers. The company pays a sustainable 2.3% yield and has been successful in pushing through large rate increases to pay for infrastructure projects and increase annual revenue.
 
4. Tobacco
If you think tobacco is not a necessity, just ask anyone who has tried to quit smoking. In the event of an environmental or economic catastrophe, people may cut back on most other products, but they will always buy their cigarettes.

Lorillard (LO) is the third-largest cigarette producer in the U.S. and has been increasing its market share steadily from 11.8% in 2009 to 14.1% in 2011. The stock pays a huge 5.1% dividend yield and trades at just 13.1 times trailing earnings, well under the industry average of 18.6.

Philip Morris International (PM) diversifies exposure to the industry with its strong international presence and brands like Marlboro and Virginia Slims. The shares are relatively expensive at 16.7 times trailing earnings, but management has plans to expand into the Chinese market, which could significantly increase earnings.

The "Doomsday" portfolio
Risks to consider: The risk to buying any kind of insurance is that you never need to use it. That is why I have tried to select investments that would perform well even if the worst-case scenario fails to emerge.

Action to take:
Just as you would not spend your entire income protecting your house with insurance, you would not devote your entire nest egg to a "doomsday portfolio." However, allocating a small chunk -- maybe 5% to 10% -- of your equity portfolio to these kinds of investments is definitely a smart move.

Joseph Hogue owns shares of XLE.
StreetAuthority LLC owns shares of PM in one or more of its “real money” portfolios.


More from StreetAuthority
19Comments
Aug 21, 2013 8:38PM
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So what we have today is Carter like economy, except this one is being run by the most corrupt President ever!  At least Carter was honest...

 

Aug 21, 2013 10:24PM
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All the stocks mentioned went down in price today, not even a doomsday. How about poultry and vegetables on your backyard to feed on?
Aug 21, 2013 8:34PM
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Actually, this is a lesson in diversification and represents a fraction of total holdings. I like it. Not quite sure that Phillip Morris will benefit much from expanding into the Chinese market - aren't the Chinese a HUGE part of counterfit Marlboro cigarettes? As I said, I'm not quite sure...could be wrong there.
Aug 22, 2013 11:31AM
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Doomsday?  You have no business being in stocks if you think that's in the cards.  If you're a V_L type, then you should be talking about having your money in physical gold, canned goods, paid-off real estate that is defensible with a reliable water source, guns and other basic equipment like tools.  Your pet stocks will dive just like the rest of them; review what happened in the prior meltdown. 
Aug 21, 2013 7:25PM
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Just when you thought it was safe to get back in the water, along comes this "zombie apocalypse" portfolio. If things get as bad as mentioned in this article, owning shares in companies won't do much good. Those who believe in a financial collapse would be foolish indeed to buy shares (duh).

 

If you are worried, buy physical assets, land, gold, silver, bullets, seeds, a good rainwater collection system and so on. I mean, what are you gonna do, smoke your Phillip Morris stock certificates? Better to have seeds and grow your own even if you don't smoke. And what would you rather have, thousands in worthless stock certificates or a couple of acres of raw land?

Aug 22, 2013 11:54AM
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I WOULD SAY GOLD, SILVER, WATER , OIL, AND A UTILITY STOCK.
Aug 22, 2013 12:02PM
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Galveston Hurricane. Black Plague. Attila. "large-scale disasters -- man-made or natural -- seem to be getting stronger and more frequent." No.
Aug 22, 2013 11:10AM
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Back when I voted a straight GOP ticket I thought Carter was a bad President.When we got

papa Bush and we saw what an idiot he was I realized Carter wasn`t that bad.When we got

baby Bush we really got a loser.If you have a brain you realize Obama is one of our best

Presidents ever.Besides getting us out of one war and almost out of another, the market is

up well over 85% before dividends.I can`t count all the money I`ve made with Obama.We`ve

got a great President,a fine family man who makes me proud to say"HE`S MY PRESIDENT"

Aug 22, 2013 12:31PM
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RUSTP;Why don`t you start another right wing conspiracy?The Repubs have no stars

to win the WH, just hotdogs.Maybe Palin can win on her looks.Face it, the Repubs are on the outside

looking in.Most people can see through the Repubs bitterness and hateful war mongling.

Aug 22, 2013 12:11PM
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IT`S ALL MINE:Obama makes me proud to be an American.After having a war mongling

lier in the WH, Obama has brought dignity back to the Oval office.

Aug 21, 2013 9:55PM
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Ever other day Another Gold Pushing article put out by the  jewish rulers

Gotta keep ponzie scheme going.  Tomorrows story is another don't retire until 70YRS old

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