Commodities, Option Writing Prove Valuable Diversifiers Amid Stock Chaos
The forest fire in the stock market this week has presented a range of questions for high net worth investors with significant portions of their wealth at stake.
What to do? Where to go? Sell or hold? Is this "just a correction" or the beginning of something more sinister?
Only time holds the answer to those questions.
However, a telling note was a mostly buried article on CNBC.com at the height of the bloodletting:
The stocks that are doing well in the face of the plunge: Tobacco and cereal
"…consumers will still buy cigarettes and eat cereal regardless of economic conditions."
What a novel concept.
Indeed, if you're wondering how commodities fared in the face of the stock market turmoil, your answer is more or less business as usual. Wheat prices were up about 1% on the week. Cocoa prices remained near two-month highs. Coffee prices continued to edge along a channel.
You see, wheat, coffee or cocoa prices really don't care what is happening over in stocks. People still need something to eat, drink and smoke while they are watching their stock portfolios crash.
Granted, not every commodity went up during the week. But the market fluctuations in some commodities had little to do with the carnage in stocks (with the possible exception of spillover selling in crude oil). Regardless, lower prices can actually be a boon for option sellers short call options in certain markets.
For investors wondering what to do next, the first thing you might consider is your asset mix. News channels like CNBC and Bloomberg are great sources of information. But their overriding premise is that there are two assets classes - stocks and bonds.
Sophisticated high net worth investors know better. A February 7 article by CNBC itself reveals that billionaires actually keep only a small portion of their overall assets in equities. (Here is Where the Super Rich Keep Their Money, CNBC.com, Feb 7, 2018).
Sophisticated investors know that proper diversification requires not only diversification of asset class but also diversification of strategy. How many investors do you know that made money this week? If you're not holding at least some assets that helped you during the stock market downturn, you're likely not properly diversified.
For a brief tutorial only this, I recommend reviewing our video from this week How to Get Real Diversification in Your Portfolio.
As a high net worth investor, you have the means and access to such investments and include them in a diversified, fortified asset and strategy mix. It's the advantage you have - one that can be used to both protect and grow your wealth in any kind of market environment.
The reasons you should be using this advantage were on full display this week.