Risks to your investments now: Disasters

Disasters, war, political and economic upheaval

Even the biggest geopolitical events — those “black swans” that cause widespread disruption — typically don’t leave a lasting mark on financial markets. For instance, when Asia’s fastest-growing economies went into a skid in July 1997, investors feared that the contagion would spread worldwide and they scurried for safety. The Dow Jones Industrial Average took one of its worst drubbings ever on Oct. 27, 1997, losing 554 points, or 7.2%, but the index recovered and ended that year up more than 22%.

Even with all the shocks so far in 2011, both the Dow Jones Industrial Average and the Standard & Poor’s 500-stock index posted their best opening three months of the year in more than a decade. April was another big winner, with the Dow rising 4% in the month.

“The question I hear more often than not is, ‘What is it going to take to break this market?’” said Ed Yardeni, chief investment strategist at Yardeni Research in Great Neck, N.Y. “The black swans that are out there are pretty scary, but the market has been extraordinarily resilient.”

Still, the current troubles in the Middle East and Japan seem more serious than anything the world has faced since the 2007 subprime mortgage crisis. Japan’s disaster disrupts the technology and automobile industries; the Middle East crisis threatens crucial oil supplies. Said Baumohl, the Economic Outlook Group strategist, about the Middle East uprisings: “If the State Department can’t figure out what to do, investors ought to show some caution.”

Your best bet: Add gold and other precious metals, which, like Treasurys, are considered a safe haven. Know that a little bit of gold can go a long way to offset declines in other assets. You can own physical gold via several exchange-traded funds, including SPDR Gold Shares and iShares Gold Trust. (Be aware, though, that if you decide to invest in gold-mining companies, they may perform better or worse than the metal itself.)

“We control risk by owning gold,” said Charles de Vaulx, co-manager of the IVA Worldwide and IVA International funds, which each had about 5% to 6% of assets in gold at the end of March. “I know the price of gold is not [as cheap as] what it used to be,” he said, “but there are still risks out there.”

De Vaulx points to such examples as the Middle East and the potential for the U.S. bond market to react violently once the Federal Reserve begins to raise short-term interest rates. “As a hedge against extreme outcomes,” he said, “gold makes sense.”

http://www.marketwatch.com/story/the-4-biggest-risks-to-your-investments-now-2011-05-02?pagenumber=2